In its monthly poll of fund managers, the US bank found that in December only 6 per cent of Britain's leading institutions expected a stronger economy in 1999, down from 9 per cent a year ago.
The fund managers anticipate a year of sluggish growth, with the British economy set to expand by just 1 per cent in 1999 and by 1.8 per cent in 2000.
The mounting gloom is pushing institutions towards companies whose earnings are partially cushioned from the slowdown.
According to the survey, three-quarter of fund managers favour traditionally defensive "growth" stocks such as pharmaceuticals and utilities. A tiny minority are still keen on "cyclical" stocks, such as construction and high-street retailers, in the hope of a near-term recovery.
The City's pessimism was also reflected in fund managers' preference for UK gilts - a traditional safe-haven in difficult times - and their aversion to property.
However, institutions believe that the troubled state of the economy will prompt the Bank of England to slash interest rates over the next 12 months: every fund manager polled by Merrill Lynch expected UK rates to fall in 1999.
On average, they believe that rates will touch 5.4 per cent by the end of next year, from the current 6.25 per cent.
"Fund managers are defensive and are playing it safe," according to Trevor Greetham, Merrill Lynch's global analyst.
"They are saying that they expect cuts in base rates to feed through into a recovery in the year 2000. They expect the economy to bounce back, but it will be nothing to write home about," said Mr Greetham.Reuse content