There's a danger of return to recession, says L&G

L&G, which owns around 4.5 per cent of the FTSE all share index, warned looming government spending cuts threaten to send the UK economy back into recession.

L&G Investment Management (LGIM) economist James Carrick said: "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.

"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."

In early 2008 LGIM flagged the possibility of a UK recession. Yesterday, its modelling suggested a 10 per cent chance that year-on-year economic growth will be negative in a year's time, rising to 33 per cent for 2012. L&G said this suggests that the UK economy may begin contracting as soon as the second half of 2011.

Mr Carrick added he expects the Bank of England to continue to give support to the economy through low interest rates and more quantitative easing.

"The BoE wants to ensure that sterling does not rise further," he said. "There's a danger that fiscal tightening makes the pound a more credible currency than the euro or the US dollar, undermining the export recovery."