The UK economy faces a one in three chance of falling back into recession by 2012, Legal & General Investment Management (LGIM)'s economist has warned.
Using the same model that highlighted the possibility of the financial crisis at the start of 2008, LGIM economist James Carrick suggests there is a 33% probability of recession in 2012 because of the Government's fiscal tightening measures.
Carrick says the model suggests a 10% chance that year-on-year economic growth will be negative in a year's time, rising to 33% by 2012. However, since the figures are calculated year-on-year, the UK economy may begin contracting as early as the second half of 2011, Carrick warns.
"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," he added.
"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."
Carrick says the economy is not yet strong enough to have the "automatic stabilisers" of low taxes and high spending removed, and as a result the Bank of England would need to offset this by providing extra support to the economy.
"The BoE wants to ensure sterling does not rise further," Carrick added. "There's a danger that fiscal tightening makes the pound a more credible currency than the euro or US dollar, undermining the export recovery. Low interest rates should also boost the profitability of bank lending, helping to improve credit conditions."
