Investors should exercise caution over the coming months as the UK is far more likely to suffer a recession than it was in 2001, according to James Carrick, investment strategist at Legal & General Investment Management (LGIM).
Carrick says a large number of economic indicators are worrying and the Bank of England has limited room for manoeuvre, which could result in major problems for the UK.
LGIM believes the Bank of England’s current forecast, that growth will be below trend in 2008 and recover in 2009, is over-optimistic and the UK is as much at risk of recession as the US.
“More indicators are signalling danger now than before the 2001 economic downturn, despite a weaker pound,” says Carrick.
“The economy is borrowing more now than it was then and lending standards appear to have been tightened aggressively.”
He says high food and energy prices are limiting the Bank of England’s ability to boost the economy, while deteriorating indicators in the Euro area mean investors should prepare for a recession.
LGIM’s analysis shows a number of major indicators, including debt, oil prices, lending standards and interest rates, are worrying.
Carrick says that, in isolation, a single indicator is not a problem. However, numerous problem indicators tend to exponentially increase the chance of a recession.
Based on LGIM’s current economic analysis, the only positive area is the weakness of the pound, while all other indicators, including the most important ones, are showing signs of danger.
“If a series of problems all happen at once, the pressure can become too much. The natural upward trend of rising productivity, incomes, consumption and investment can be replaced by a self-reinforcing downturn of unemployment, defaults, tighter lending standards and weaker spending,” says Carrick.
LGIM recommends investors prepare themselves for lower growth across the board, but expects overseas assets to outperform over the next few years.
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