Liverpool have so far made just one signing this summer in the shape of 17-year-old Sepp van den Berg.
Manchester City, meanwhile, have added Spanish midfielder Rodri for £62.5million and re-signed left-back Angelino.
Jurgen Klopp’s Liverpool side finished just one point behind City in the Premier League last term.
The Reds only lost one of their 38 matches but Nicol believes improvement is needed at the back, as well as an increased goal threat in midfield.
I think Liverpool need to strengthen. I think they need to strengthen at centre-back
“City still have a stronger squad than Liverpool,” Nicol said on ESPN FC.
“Actually they’ve added a real strong piece in Rodri in my opinion.
“So you could say that they have actually got stronger since last year.
“Considering they won the title, yes it’s theirs to lose and Liverpool’s to try and take that extra step.
“I think Liverpool need to strengthen.
“I think they need to strengthen at centre-back and they need to figure out a way of getting goals from the middle of the park.
“That will make the difference.”
City have lost captain Vincent Kompany, after he decided to leave at the end of his contract to become player-manager at Anderlecht.
But Nicol expects Pep Guardiola to replace the Belgian before the window shuts.
“At the end of the day the reason they won I guess was because of the form of Kompany in the second part of the season, which they have [now] lost,” he added.
“Yes that is a concern.
“But at the end of the day right now the way football’s played it’s about scoring goals and nobody scores more goals, pretty much, than Manchester City.
“So yeah, there is a piece of the puzzle needing filled, but with the money they have, I think they’ll do it.”