In note analystsBCA Research noted that UK economic growth indicators "remain weak," and business confidence and employment data "signal a recession."
The UK economy faces the risk of a "significant recession," raising the possibility of a "much more aggressive" easing cycle from the Bank of England, according to analysts at BCA Research.
They added that while job losses are still relatively small, falling profit growth raises the likelihood of further layoffs.
"Bottom line: the UK labour market is deteriorating at an alarming rate. In many respects, it already looks recessionary," the analysts stated. "Unless the data improves, the labour market risks pushing the UK economy into recession."
At the same time, wage growth has slowed and the distribution of services prices has normalized, supporting forecasts for core inflation to decline to the Bank of England's 2% target this year.
Given these trends, the Bank of England is expected to meet market expectations of a 41 basis point interest rate cut this year. The central bank will cut rates by 100 basis points in 2025.
For investors, BCA analysts noted that UK equities "remain attractive" despite domestic weakness, partly due to potential lower borrowing costs from the Bank of England, a weaker pound, and international revenue. They favor UK equities over their Eurozone peers over the next three to six months.
"UK equities are trading at a discount and are not yet overbought," the analysts said.
The energy market could also "return to being a tailwind" for these companies, they argue, emphasizing that a possible regime collapse in Iran could "trigger a historic oil supply shock." "Given the significant presence of oil and gas companies, the broader UK market has outperformed eurozone equities whenever oil prices have risen," they noted.