UK - The UK economy faces a one in three chance of falling back into recession by 2012, Legal & General Investment Management (LGIM) has warned.
Using the same model which highlighted the possibility of the financial crisis at the start of 2008, LGIM economist James Carrick found a 33% probability of recession in 2012 because of the government's policy tightening plans.
Carrick said the model suggested a 10% chance that year-on-year economic growth would be negative in a year's time, rising to 33% by 2012. However, since the figures are calculated year-on-year, the UK economy may begin contracting as early as the second half of 2011, Carrick warned.
"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," he added.
"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."
Carrick said the economy was not yet strong enough to have the "automatic stabilzers" of low taxes and high spending removed, and as a result the Bank of England would need to provide offsetting support to the economy.
"The BoE wants to ensure sterling does not rise further," Carrick added. "There's a danger that fiscal tightening makes the pound a more credible currency than the euro or US dollar, undermining the export recovery. Low interest rates should also boost the profitability of bank lending, helping to improve credit conditions."
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