May 27 (Bloomberg) -- The U.K. recession probably will end in the second half of this year, according to strategists in Edinburgh at fund managers overseeing 237 billion pounds ($378 billion). Then growth may stall again over the next two years.

The shape of the global economic recovery might be a “W,” a “U,” an “L” or a “square root,” though definitely not a “classic V,” as job losses escalate and governments and consumers struggle with debt, the strategists said.

“It’s a square-root recovery, where you see the sharp upward move and then it goes sideways,” said Andrew Milligan, head of strategy at Standard Life Investments, which manages 118 billion pounds. “Expect volatile economic data, expect volatile corporate reports, expect volatile consumer spending.”

The fund managers’ views from the Scottish capital are at odds with British Prime Minister Gordon Brown and Chancellor of the Exchequer Alistair Darling, Scots whose constituencies are in or adjacent to Edinburgh.

Darling predicted in his annual budget April 22 that the British economy will start to rebound later this year and that economic growth in 2011 will be 3.5 percent. That optimism about a “V”-shaped recovery isn’t shared by the International Monetary Fund. The U.K. recovery will be “relatively slow and protracted” as lending takes longer to resume than previously thought, Bank of England Governor Mervyn King said May 13.

Growth Forecasts

The U.K. economy likely will contract 4.1 percent this year, the IMF said May 20. That compares with a 3.5 percent decline Darling forecast in his budget. The IMF also wants the British government to cut debt faster than it’s planning and keep a lid on spending, it said in its annual health check on the British economy.

Standard & Poor’s cut the outlook on its AAA rating on the British economy to “negative” from “stable” the day after the IMF delivered its verdict and the ratings company said there was a one-in-three chance it would downgrade the U.K.

“Recoveries are normally like a ‘V,’ other people have talked about a ‘W’-shaped recovery where you get another downturn,” said Bill Dinning, 49, strategist at Aegon Asset Management, the unit of the Dutch insurer that runs 42 billion pounds in Edinburgh. “It’s difficult to argue that we’re going from darkness to nothing but sunshine.”

The recovery, when it comes, will be anemic and choppy, said Ken Adams, head of global strategy at Scottish Widows Investment Partnership, the fund unit of Lloyds Banking Group Plc, which oversees 77 billion pounds for clients.

‘Clear Headwinds’

“It is hard to get excited about growth,” said Adams, 43. “The trend could be less than we are used to. It’s very hard to forecast the trajectory of the recovery in terms of time as there are some clear headwinds in place.”

Adams, like Milligan, is anticipating periods of rapid growth and others when it slows. “Quarter-on-quarter the data could be quite weak,” said Adams. “I am prepared for a reasonable amount of economic volatility with lower than average growth over the next five years.”

Aegon, SWIP and Standard Life Investments are all “overweight” on investment-grade corporate credit and equities, the strategists said.

Standard Life has more money than usual invested in U.K. and U.S. government bonds as well as in stocks in the two countries, said Milligan.

The U.S. recovery will likely be weaker than previously estimated when the economy comes out of recession during the next quarter, according to a survey of business economists published today.

Investor Confidence

The bounce in markets since March came as investor confidence increased in governments’ ability and willingness to devise policy initiatives, said Milligan.

Investor confidence turned a long way ahead of everyone else’s attitude, according to Gerry Celaya, 44, head of research at Redtower Research in Angus, northeast Scotland. By the end of this year, or early in 2010, it will be clear that markets “bottomed” in March, he said.

The MSCI World Index has surged 40 percent after reaching its lowest since 1995 on March 9. The Standard & Poor’s 500 Index has jumped 35 percent in the same period. The FTSE 100 Index has risen 26 percent since falling to a six-year low March 3.

“A U-shape recovery kind of makes sense,” said Celaya. “Some sort of a long drawn-out base with a gradual acceleration.” Still, the markets may behave like Japan in the 1990s where after an initial collapse they “plateaued,” creating an L-shaped recovery, Celaya said. “So, L is probably the biggest risk we are looking at. But we are still in the U camp.”

Question Mark

Dinning, who expects the pace of recovery to be “relatively slow,” said there is a “big question mark about future growth rates in the economy and future growth rates of profitability, particularly as we went into this downturn with profits at historically high levels.”

Predicting the shape of the global recovery is complicated by the scale of banks’ toxic assets which triggered the recession, said the strategists. The cost of bailing out Britain’s banks may be 175 billion pounds, the second-highest in the world as a share of national output, the IMF said April 21. Bank losses since the start of the credit crunch in 2008 now total almost $1.5 trillion, according to data compiled by Bloomberg.

“This is the worst economic and financial crisis for 70 years,” said Milligan, 52. “How we come out of it is still extremely uncertain.”

To contact the reporters on this story: Peter Woodifield in Edinburgh at pwoodifield@bloomberg.net; Rodney Jefferson on r.jefferson@bloomberg.net.

Last Updated: May 27, 2009 12:13 EDT