Ignore market tantrum – the UK economy is 'rock solid'

A market rout that has pushed the UK's benchmark stock index to a three-year low today does not accurately reflect conditions in the economy, which is facing a near-zero risk of recession.

That's according to a report from Goldman Sachs, which suggests fears over the global economy in general are overdone, says Ambrose Evans-Pritchard in the Daily Telegraph. "An array of 'alarm' indicators - based on the experience of 20 countries since 1970 - suggest that the current business cycle is still in full swing and far from exhaustion," he adds.

In particular, the investment bank's chief US economist, Jan Hatzius, said credit ratios are high but have not spiked – and there is plenty of slack left in larger economies to grow.

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Hatzius cites a host of market crashes that did not presage a recession, including the 1987 stock market crash and the corporate credit squeeze of 2002-2003 at the onset of the Iraq War, as examples of how turmoil on markets can be misleading.

The UK is better placed than most, according to the report. It points to a stable and reasonable credit-to-GDP level, solid housing market growth and relative insulation from global issues due to a reliance on domestic demand, as it sets a tiny recession risk looking ahead two years that is lower than any other major economy.

"Britain appears rock-solid under the Goldman Sachs model with a mere three per cent risk of losing its footing over the next eight quarters, followed by Sweden, Denmark and South Korea," says Evans-Pritchard. "The country most at risk is deemed to be Switzerland, with a 95pc likelihood of recession within two years."

The Goldman model looks only at technical models and does not gauge the impact of less tangible factors. As such, it is unlikely to do much to calm febrile markets, which are selling off rapidly amid predictions of tougher conditions to come that will weigh on growth.

Fuelling fears today is a report from the Institute of Fiscal Studies, which, the BBC notes, warns weaker wage rises and softer exports could throw a spanner in Chancellor George Osborne's "inflexible" plan for a budget surplus by 2020. This brings a more than one in four chance of further tax rises and spending cuts – and petrol taxes and some benefits might be cut, anyway.

Elsewhere, there is also a report showing the UK's trade deficit slumped last year, with the annual disparity between goods exported compared to those imported hitting a five-year high. A slight improvement in December failed to stop the deficit widening in the fourth quarter to £10.4bn, which Reuters adds could act as a drag on growth when revised figures are published.