Investor warns of a grim time ahead in the UK

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ONE of the stock market’s biggest investors has warned UK companies are unlikely to have much incentive to invest in 2012, increasing the likelihood of another recession.

Legal & General Investment Management, which manages £347bn in assets, warned the UK is likely to miss growth targets.

“The UK is not good at all,” said Tim Drayson, economist at LGIM. “It’s going to be a recession and it’s going to feel pretty horrible as well. That means unemployment creeping up and stagnant incomes.”

LGIM predicts a 0.4 per cent fall in GDP in 2012, compared with a consensus forecast of 1.1 per cent, as the eurozone’s woes and economic uncertainty drag down the UK. Its first estimate of 2013 predicts only 0.5 per cent UK growth.

Mr Drayson said the bleak outlook is compounded by UK companies’ reluctance to spend, despite many having repaired their balance sheets.

“The UK corporate sector looks in a reasonable position,” he said. “But the concern is that companies look at the demand outlook and see there’s no real incentive to make investment.

“They’re the only sector that have the cash to generate the effective growth. You need the corporate sector to borrow and invest. It’s hard to see the consumer doing much.

“The housing market is pretty stagnant. It’s almost stagnation and retaining the status quo.”

However, he predicted companies “won’t be cutting (jobs) aggressively”, having already shrunk their workforces during the previous recession.

The UK’s independent forecasting body, the Office for Budget Responsibility, has cut its growth forecast to 0.7 per cent in 2012, rebounding to 2.1 per cent in 2013. But LGIM said the OBR’s prediction is “far too optimistic”.

“The UK cannot decouple from its largest trading partner, the European Union, and will continue to struggle so long as the crisis drags on,” it said.

LGIM sees inflation coming down sharply next year, as the effects of this year’s VAT sales tax hike, utility bill increases and commodity inflation wear off.

But despite this, the investor sees little improvement in UK consumers’ spending power. “It’s hardly a great environment,” said Mr Drayson. “We’re only talking a return to stagnant incomes rather than falling. It’s still one where the consumer is struggling to get out and spend.”