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Barings warns of increased risk of UK plunging into a renewed recession

- Most likely outcome is the UK will stage a modest recovery, but with greater vulnerabilities than other major markets -

London, 17 March 2010:   Baring Asset Management’s (Barings) latest global economic research suggests that of the major global economies, the UK looks most vulnerable to a renewed plunge into recession.  This is particularly true if a post UK election hung Parliament fails to come to grips with the budget deficit, and markets force a Greek style retrenchment on the country. 

However, although Barings says that there is a slightly higher risk of the UK falling back into recession than there was a few weeks ago, it believes it will most likely stage a modest recovery but with greater vulnerabilities than the US or the core of Europe. 

In terms of global markets, Barings says that the most important driver is the perception that policy is now tightening across the globe.  Some of this is healthy tightening, as seen in China after a very successful rebound of activity, with GDP hitting 10.7%.  This is a necessary part of the normalisation process that is needed to cool the property markets which in some areas are taking on bubble characteristics.  Barings expects similar action to spread to India and Vietnam where in both cases the slowdown has actually been relatively shallow and inflationary forces are still near the surface.  Although this will dampen market action in the very short term, longer term it will allow these markets to advance again on the basis that the economic cycle will be extended by prudent action now.

In Europe, Barings says that the tightening action is coming in a different form.  Here, markets are imposing a more stringent solution on Greece and by extension Spain and Portugal as a penalty for past excesses.  It believes that this is likely to see all three countries contract in GDP terms this year.

Finally there is the form of regulatory tightening in the banking sector, which, to some extent, is affecting much of the Western world.  This is the behaviour of banks ahead of what they see as likely new regulation where they are voluntarily shrinking certain activities and parts of their balance sheet to avoid painful actions later in the cycle. 

Andrew Cole, a director of Asset Allocation at Barings explains: “These latter two forms of involuntary tightening probably mean that official tightening via rate rises is even further off than we had otherwise thought likely.  But it does suggest that the environment in Western economies is going to remain very weak throughout 2010.” 

ENDS

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Version 03/2010