UK is heading for recession

By Philip Aldrick, Economics editor

 

 

 

The UK will contract by 0.4pc in 2012 as a result of an even deeper recession in Britain's major trading partner, the eurozone. The prediction makes LGIM the fourth leading forecaster to warn of an outright recession. UBS, Capital Economics and Standard Chartered all expect the economy to shrink over the coming 12 months.

 

Tim Drayson, LGIM economist, said: "Given planned austerity measures, we feel that the [official] forecasts [of 0.7pc growth] would be achievable only if the private sector grows at near record levels. We see no basis for that."

 

He said he did not expect the Chancellor to relax policy as "the one reason the UK is not on negative watch by the rating agencies is because of the credibility of our policy framework". Instead, he expects that Bank of England to top up the latest £75bn of quantitative easing with another £50bn-£100bn.

 

Households will remain squeezed until the end of next year, when recent energy bill increases will drop out of the calculation, and exports will perform poorly because the eurozone will be in recession. That leaves business investment to support growth, "but why would corporates go out and invest in these conditions?" Mr Drayson asked.

 

He expects the eurozone, which accounts for 40pc of UK trade, to shrink by 0.8pc in 2012.

  

Weak growth in both Europe and the US in future years, as countries grapple with their public debts, will damage the pace of the UK recovery, causing the Chancellor to miss his fiscal mandate, Mr Drayson added. "We think the Chancellor will miss his targets as revenues come in lower than forecast, due to slower growth," he said.

 

"We're not a safe haven, UK prospects are weak... It now looks likely we'll be in austerity come the next election."

 

LGIM expects the economy to shrink by a quarter point in the last three months of 2011, and both of the following two quarters before stabilising in the second half of 2012. Telegraph