International investors could desert the UK if they lose further confidence in the juddering economy, Liz Truss’s government was warned as the pound hit a new 37-year low against the dollar.
Fears that the British economy has already entered recession following much worse-than-expected retail figures sparked heavy selling of the pound on the money markets on Friday.
Leading fund manager Nicola Horlick, often dubbed “City superwoman”, warned that investors could decide against investing in gilts needed to fund extra government borrowing, as Ms Truss plans a £100bn-package to control soaring energy bills.
Ms Horlick said Friday’s retail figures, showing a 1.6 per cent sales drop in August compared to the 0.5 per cent fall predicted, were “very bad indeed” – reflecting a sharp decline in spending among Britons “battered” by rising bills and food costs.
“I wouldn’t be surprised if the [next GDP] figures show that we are actually already in recession,” the expert told BBC Radio 4’s World at One. “Currency traders are looking at these [retail] figures and saying, ‘This looks like a recessionary environment.’ Therefore they are devaluing the pound.”
Chancellor Kwasi Kwarteng is expected to set out more details on the energy plan and announce the reversal of planned tax rises at his mini-Budget on 23 September, with the government expected to increase borrowing.
But Ms Horlick warned that investors could turn away from gilts needed to fund the extra spending during the energy crisis “if there’s a general lack of confidence in the UK economy”.
She said: “We are relying on people to actually buy gilts to fund all of this, and if international investors decide, ‘We don’t like the look of gilts’, that means we’re going to have to see further increases in interest rates to get people to buy gilts.”
The fall in the pound came on the 30th anniversary of Black Wednesday, when the UK had to withdraw from the European Exchange Rate Mechanism (ERM), damaging the Conservatives’ reputation of the handling of the economy for years.
Asked if the current crisis could rival the scale of Black Wednesday, Ms Horlick said it was “so important to keep international investors onside”, adding: “We need confidence in our currency. We need confidence in our debt so that people buy gilts, and if we don’t have that level of confidence… we’re going to have some big problems.”
John Hardy, head of FX strategy at Saxo Bank, said investors were worried that Ms Truss’s plans increased the risk of larger deficits, adding: “The grinding backdrop of everything that’s going on is weighing on sterling, with the UK running these massive external deficits and the risks around the new prime minister’s policies adding to that.”
Sterling dropped below 1.14 dollars for a couple of hours on Friday, taking it to its worst point since 1985. It followed Office for National Statistics (ONS) figures showing food shops, non-food shops, online retailers and fuel sellers all saw sales declines in August – the first time they have seen such a hit since July 2021.
Martin Beck, chief economic adviser to the EY Item Club, said: “The recession which retailers currently find themselves in is likely to persist through the rest of this year and into 2023.”
Ms Horlick also warned that Brexit compounded Britain’s bleak economic outlook because the burden of red tape meant the UK was unable to take full advantage of cheaper exports.
“In my view we’ve rather shot ourselves in the foot with Brexit, because it should mean our goods are cheaper and therefore our exports should be increasing,” the investment expert said.
She added: “But because we’ve made it more difficult to export to our major export market [the EU], we’re not seeing the rise in exports that we should be seeing. We should be seeing a benefit from the lower pound from that point of view.”
Ms Horlick also warned that fixed-rate mortgage rates could soon go up to 5.5 per cent, with the Bank of England expected to push up rates next week in a bid to control inflation after the national mourning for Queen Elizabeth II delayed a decision.
The chancellor is expected to spell out further details of the move to cap annual household energy bills at £2,500 at the end of next week, as well as confirming Ms Truss’s plan to reverse the 1.25 per cent national insurance rise and ditch the planned hike in corporation tax.
The Treasury will not spell out the total cost of Ms Truss’s energy plan, only giving short-term costs of possibly “a handful of months”, according to The Telegraph.
It remains unclear whether Mr Kwarteng will announce an axing of the cap on bankers’ bonuses as part of the “fiscal event”. Only 15 per cent of the public support the proposal to ditch the cap, according to a YouGov poll.
