Deflation is the most likely outcome for the global economy during the next few years, with central bank expansion of money and credit unable to overwhelm forces pushing for weaker prices, argues Lombard Odier.

As debate continues to swirl about whether markets will slide into a "double-dip" recession or manage a recovery, the Swiss-based private bank argues that while inflation may appear to be a long term risk, it regards deflation as the most likely result over the next few years.

“An environment of weak growth, fiscal consolidation, ongoing de-leveraging and Chinese biased excess supply, implies downward price pressures will intensify and spread,” the bank said in a regular note on its investment and economic predictions.

It continues: “As growth weakens globally, deflation will broaden out in the US and in Japan, whilst other regions, will see more disinflation. As we mentioned in a previous note [11 August], there is not much central banks can do about it. Pouring more liquidity into the system would have no effect on prices in a de-leveraging economy with ample spare capacity, a high degree of slack in the labour market, and oversupply of cheap Chinese goods.”

As far as asset prices are concerned, a period of sustained deflationary pressures is bad for equities and slightly positive for bonds, it said.