One in three chance of double dip recession

14 July 2010 | By Samuel Dale

L&G is suggesting a 10% chance that year-on-year economic growth is negative in a year’s time and that probability rises to 33% for 2012.

James Carrick, economist at Legal & General Investment Management, says: “The sharp cuts in public spending that the Government made in the recent emergency budget represent the largest fiscal tightening since the Second World War.

“Government figures suggest the gap left by these cuts will be filled by the biggest private sector boom ever - given how tight lending conditions remain, this is far too optimistic.”

It adds that the UK economy may begin contracting as soon as the second half of 2011.

Carrick argues that the economy was not yet strong enough to have the automatic stabilisers of low taxes and high spending removed.

He says the Bank of England must provide offsetting support to the economy and LGIM forecasts show interest rates unchanged at just 0.5% throughout next year.

Carrick adds: “The BoE wants to ensure that sterling does not rise further. There’s a danger that fiscal tightening makes the pound a more credible currency than the euro or the US dollar, undermining the export recovery. Low interest rates should also boost the profitability of bank lending, helping to improve credit conditions.”

He also says more quantitative easing is likely if interest rates do not provide the appropriate stimulus.

If you enjoyed this article, sign up here to receive daily email updates from Mortgage Strategy and Follow @mortgagestrat