There is now a greater likelihood the UK will experience a double dip next year, while it is "almost a certainty" countries such as Greece will slide back into recession, says Invesco Perpetual's Neil Woodford.
The manager of the £7.4bn Income and £9.5bn High Income funds says money supply growth and private demand will also remain weak as the UK drags itself out of the mire of economic slowdown.
"The UK economic recovery will be long, drawn out, and tough. The chances of a double dip in the UK next year have increased. The outcome will be dictated by the pace and scale of fiscal consolidation," Woodford says.
"It is almost certain we will see a recession in countries like Greece where we have seen aggressive budget cuts."
Woodford says consensus views on the economic recovery are being challenged by the headwinds the UK is currently experiencing. "Investors don't know whether to follow what gilt markets are saying about interest rates, or what equity markets are saying about economic recovery."
Woodford says banking crises take five to six years on average to resolve, and we are now about halfway through.
One thing investors can be sure of is that "a V-shaped economic recovery is for the birds", he adds.
As the economy remains weak, the manager expects UK residential property prices to fall between 5% and 10% per annum for the next two years.
Meanwhile, he says the Basel III regulations have not changed his view on holding banks.
"Significant steps have been made in rebuilding bank capital but there is much further to go. I was not surprised Basel III was diluted because it makes no sense to impose strict capital regulations on banks in the middle of a banking crisis," Woodford says.
The regulator is giving banks time to rebuild their capital bases and derisk their balance sheets, which is a good thing, but the manager warns money supply growth will remain low and banks will be unwilling to lend for some time to come.
On the inflation versus deflation question, Woodford says inflation will not be a problem for the UK, although it may be moreso for countries such as China. "The consequences of deflation are the more challenging issue," he says.
Feasibility study due
'Let’s be bold enough to demand change'
Joint life second death option added to relieve tax burden on couples gifting assets
Backed by Schroders, LGIM and the IA
New system for funds without without three-year track record