Economy to be stuck in first gear, says L&G

Legal & General Investment Management, which invests and manages assets of more than £370bn, said forecasts by the independent Office for Budget Responsibility are too optimistic.

The OBR was formed in May 2010 to independently assess public finances and the economy.

In March, it predicted GDP growth of two per cent in 2013, 2.7 per cent in 2014, rising to three per cent in 2015 and 2016.

But L&G said it believes growth will be half this rate – with the economy expanding at just 1.5 per cent between 2014 and 2016.

L&G economist James Carrick said the OBR’s forecast is too high because it is based on unlikely scenarios, such as a global boom which is not accompanied by high inflation, and a rapid increase in credit.

“We see the economy as stuck in first gear,” said Mr Carrick. “The most likely scenario is muddle through.

“We think the UK’s growth forecasts are too optimistic – again. We think the UK growth will be half of what the Government expects.

“The Government has to choose between announcing more and more austerity or taking its gamble with the gilt and foreign exchange markets (with financial stimulus).”

L&G’s bleak forecast comes just days after the UK slipped back into recession, with a 0.2 per cent fall in GDP in the first quarter of 2012.

Mr Carrick said the OBR’s predictions hinge on a global boom, similar to that seen before the credit crunch in 2004 to 2007.

The OBR forecasts the world economy to expand at just under five per cent during that period.

“The world economy overheated,” said Mr Carrick. “Food prices and the oil price shot up and we saw high inflation.

“Those growth rates proved to be unsustainable.

“When the global economy expands this fast, global inflation pressures tend to build. A combination of accelerating prices and tighter monetary policy will choke off the expansion, if not plunge the world back into recession.”

Mr Carrick added the days of easy credit are behind us, as households, companies and governments repair balance sheets and remain risk-averse.

“The OBR also expects a dramatic improvement in domestic credit conditions,” he said. “It is looking for residential property transactions to increase by more than 50 per cent over the next four years.”

The OBR said in March: “We expect residential property transactions to grow strongly in 2013 when credit restrictions start to ease and housing transactions move towards a level consistent with the historical average duration of home ownership.”

But Mr Carrick said this would reflect the fastest improvement in lending to households since the era of banking deregulation in the late 1980s.

He said: “This is very optimistic. While some improvement in credit conditions is likely, it is unlikely to be this rapid.”

Banks remain under severe pressure to shore up their balance sheets, cut costs and improve margins, with Yorkshire Bank and HSBC announcing thousands of job cuts in recent days.

Lenders including The Co-operative Bank, Halifax and Yorkshire Bank have also been hiking their standard variable rates. The spread between 90 per cent and 75 per cent loan-to-value mortgages also stands at about two percentage points, compared with pre-crisis when there was little difference between rates charged on high and low deposit mortgages.

Meanwhile, public debt is likely to climb further, said Mr Carrick.

“We think the UK public sector deficit will remain significant,” he said. “We think UK debt will be on a rising trend. There’s a risk of gilt crisis: that bond markets and ratings agencies do not like this and gilts go down.

“That would make UK public finances worse so that we have to spend more on servicing our debt.”