Britain prepares for year of ‘sluggish’ growth

Legal & General Investment Management (LGIM), which owns about four per cent of the UK stock market, said weak growth will continue and next year should feel a “little better” than 2012.

But LGIM said the austerity programme and the weak global economy will restrict UK GDP growth to just 0.6 per cent in 2013.

It said emerging economies such as Brazil, Russia, India and China (the BRICs) will “partially decouple” from the West in 2013 to create an increasingly two-speed global economy.

LGIM economist Tim Drayson said the UK next year will be “not a great environment but at least we should be gradually exiting the recession.”

“The UK economy is likely to remain on a sluggish growth path at best,” he said.

“There’s just a chance that the worst is behind us for the consumer, but it’s not going to feel great.”

The Government and Bank of England opened the Funding For Lending scheme in August, offering banks and building societies discounted loans in return for boosting lending.

Figures released earlier this month showed lenders drew down £4.36bn in the first two months of FLS.

Leeds Building Society accessed £100m and hiked its lending by £212m, while Nationwide borrowed £510m and lifted its lending by £1.8bn.

But the combined increase in lending among UK banks and building societies was just £496m.

“It’s still early days,” said Mr Drayson. “We are starting to see the mortgage spread come down.

“It will take a further period of time before impacting corporate loans.

“It should encourage more lending than they otherwise would do because it’s a subsidy.”

FLS is aimed to boost the economy in ways that the BoE’s £375bn of quantitative easing (QE) programme has failed to.

“It’s going to need some renewed turbulence for the BoE to vote on more QE,” said Mr Drayson.

“They just want to try something else. We are in unprecedented territory – policy makers do not know what works and what doesn’t.

“It (FLS) is quite a sensible policy to try.”

Mr Drayson said with inflation remaining “sticky”, the BoE will find it hard to vote through more QE.

The headline inflation rate was unchanged at 2.7 per cent last month.

Despite this, the economist said the BoE is a “long, long, long” way away from putting up interest rates from their record low level of 0.5 per cent – where they have been since March 2009.

He said they will not rise until late 2014 “at the earliest”.

He added: “We need to see a period of strong growth before the BoE consider raising rates.”

LGIM sees the FTSE 100 ending 2013 at 6,400 points.

The firm, which invests on behalf of bodies including pension funds and banks, said the key global factors next year will be the United States’ ‘fiscal cliff’, emerging markets’ recovery and Europe’s sovereign debt crisis.

The fiscal cliff is the problem faced by the US Government over tax increases, spending cuts and its budget deficit.

Mr Drayson said if the US goes “fully over the cliff”, there will be a five per cent impact on US GDP, which would be “pretty catastrophic, not just for the US, but with big global ramifications”.

LGIM sees the BRICs growing at 5.6 per cent next year, recovering from the 4.6 per cent GDP growth they are assumed to have experienced this year.

“Domestic demand in the emerging world is going to be quite a bit above consensus,” he said.

“Demand is not from the West.

“Pretty much all the growth next year is driven by emerging markets.

“There’s a lot of intra-emerging markets trade, making them less reliant on developments in the West.”

Europe will be a “transition to stagnation”, said Mr Drayson. LGIM sees the Eurozone recession continuing in 2013, with GDP falling 0.6 per cent during the year.

LGIM can trace its origins back to 1836, when Legal & General was founded to provide life assurance for the legal community.

In the early 20th Century, the client base was broadened to include non-lawyers.

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