Ken Taylor: After big shove it's time to see if there's any life in economy

THE scale of the quantitative easing programme means that any signs of recovery have had to be viewed within the context of massive liquidity being pumped into the markets.

As we now know, this programme has been put on hold by the Bank of England and the release of the minutes from its most recent monthly meeting revealed that the decision was a unanimous one. Like all committees, they do reserve the right to change their mind, but it might fairly be concluded that the intention is to avoid further injections of money for the foreseeable future.

So what does this tell us about the state of our economy, and have we perhaps reached the beginning of a gradual recovery?

Looking at this from the perspective of investors it is very difficult to be particularly positive, or bullish about the coming year. That is not to say that all is by any means doom and gloom, but there remain some very serious threats to the chance of there being much progress in the coming months.

There is solid evidence to support the belief that we are very quickly heading for a double-dip recession, as the combination of liquidity injections being withdrawn while VAT increases impacts negatively on the UK consumer. There seems an alarming tendency in this country to be in some way amused by the plight of the southern European economies, while failing to acknowledge that our own debt burden is no small problem in comparison. We face an election in a matter of weeks, the outcome of which remains uncertain, so there is as yet little indication of how public spending might be affected.

More worryingly, neither of the major parties appears to exhibit a true understanding of just how much painful medicine will need to be dished out in the coming years for us all.

Against all of this it needs to be remembered that the rate of inflation in the UK is now above 3 per cent. Those relying on deposit savings for income are now getting negative real returns, and that is likely to remain the case for quite some time.

Therefore, in order to achieve a total positive return on invested capital, cash is certainly not king. So what should investors be doing?

The key point for investors is to keep expectations realistic. Last year in isolation actually produced handsome returns for many investors, but it would be folly to anticipate the same growth this year. We have (hopefully) moved from the very epicentre of a global financial meltdown, but to assume that all is now rosy would be very nave.

More realistically, a healthy degree of caution is required by investors. Profits when they arise should be banked, and I believe there may well be times when it becomes desirable to tactically move to cash, where possible. Allied to this, I would urge investors to give serious consideration to the level of risk they are taking when seeking growth, as too often one does not justify the other. In simple terms, this is likely to be a year in which preserving capital values as a minimum outcome will be viewed as acceptable.

Let me close with an analogy, made by a well-respected US investor and commentator, concerning the reality of where we are now in the recovery. Fiscal stimulus is described as being the provision of a tow truck for a car (the economy) that has broken down, or stalled. At some point, the car needs to be set free, and hopefully will be capable of once again moving unassisted, though this remains to be seen. Then consider the image 15 months ago of an aeroplane with a single engine that burns out in mid flight. It is a far less worrying thought to view a spluttering car when compared to an engineless plane.

• Ken Taylor is director of Mackenzie Taylor Wealth Management.