Legal & General Group: Osborne has got it wrong
When Britain’s biggest investor speaks it is worth listening. But the message from Legal & General Group Plc (LON:LGEN) is gloomy: the chancellor has got it wrong, it is too early to apply the brakes, and we’re heading back towards recession.
The life and pensions company which owns about 4 per cent of UK plc reckons there is a 10 per cent chance of year-on-year negative growth by mid-2011 and a 33 per cent chance by 2012. As the usual recession test is simply two quarters of negative growth, the probability is much higher than the company says.
In private briefings to the market, L&G’s economist, James Carrick, is challenging the chancellor’s budget forecasts, suggesting a second round of spending cuts and tax rises will be necessary. He says unemployment will increase significantly, that interest rates will not rise until at least 2012 and that rather than unwind its quantatative easing programme, the Bank of England is likely to have to buy more assets from the financial sector.
Central to Carrick’s pessimistic argument is a calculation that, if the public-sector economy retreats by 0.75 per cent because of cuts, the private-sector has to grow by 6 per cent a year for five years for the budget targets to be met. That was not achieved even in the dot.com boom; it would be the biggest private-sector boom since the Second World War – and it is totally unlikely now.
So while the consensus is looking for 2.25 per cent growth in GDP, Carrick reckons 1.7 per cent would be good and has pencilled in just 0.8 per cent for the end of this year.
Legal & General is out on a limb with this view but as a big investor it is worth knowing what it is saying in its briefings. But even if the view is extreme, it may be dragging the trend in the right direction. Public spending cuts and the reduction in consumer spending that will be hit by a VAT rise will hit demand and push up unemployment, potentially reducing confidence yet further. That will encourage the Bank to keep down interest rates, not least to depress the pound to help exporters.
But if the company’s economist is only half right, there will be a 3 per cent boom in the private sector – 2 per cent if he is just one-third correct. That is not unimpressive in the current circumstances, and with interest rates remaining low and that help from sterling, the picture for corporate Britain is surprisingly positive from this gloomy view. Even if the cloud is black, it could have a silver lining.
