The UK will slow this year but avoid recession, according to economists at Norwich Union.
The insurer believes the economy could even start its recovery by the end of this year as it responds to lower interest rates.
Stewart Robertson, a senior economist at Norwich Union, says weaker consumer spending will prompt an initial slowdown and house prices will remain flat, with falls in some areas.
He says interest rates will fall to about 4.5% but the fall’s pace will depend on an improving outlook for inflation.
Economic growth for the year looks set to drop below 2% from 3.1% achieved in 2007, according to Norwich Union data.
Robertson says weaker growth and fears about the effects of the credit crunch will force the Bank of England to reduce interest rates by at least 1% this year.
He says: “The housing market may see falls in some areas, but fears that prices will fall by 20% or more is probably overdone. There has been some good news; car sales appear to be improving while the number of new jobs created picked up sharply towards the end of 2007.”
However, Gary Reynolds, director and chief investment officer at Courtiers, says Norwich Union should not raise its hopes of such a fast recovery as consumer spending will decline on the back of falling house prices.
He says: “The economy will be weak by the end of the year and interest rates will get down to 5% by the end of December.
“They’re being very optimistic thinking we’re going to have a shallow landing and lift-off again. If [the economy] dips and goes up again, interest rates will go up again fast to dissipate the effects on inflation.”
Robertson says we will see a sustained recovery in the markets until the second half of this year “when the outlook should become clearer and wider realisation that recession has not occurred feeds into sentiment,” while Reynolds disagrees.
However, they both believe share valuations look attractive against bonds as market falls and volatility continue.
Reynolds says: “Share prices are unbelievably attractive compared to bonds but when they’re most attractive it is because everyone is scared to buy them.
“You don’t want to invest in the equity market if you want you money back in April but if you want money back in three years, you don’t want to be in bonds, you want to be in equities. You’ll get a huge payout.”
He believes financials will provide the best returns and both economists say corporate stocks look in particularly good shape.
Reynolds says: “You’ve got record profits, sound balance sheets, equity in good value and you’re not paying massive price earnings ratios.”
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