UK government ‘taking a very big risk in going for growth’
THE UK Government’s new mini-budget announcement will ‘end in tears’ in its dash for growth, according to a local chief investment officer.
Kevin Boscher of Ravenscroft said that only time will tell whether the government’s announcement was 'madness or genius' for the economy and sterling assets.
‘The UK government is taking a very big risk in going for growth at a time when global activity is slowing rapidly, inflationary pressures are intense, liquidity is draining away and geopolitical risks are elevated,’ he said.
‘Sceptical investors are certainly doubting this strategy today as seen by the dramatic market moves.’
Markets started to react after the Bank of England raised rates by 0.5% last Thursday, and the sell-off in sterling assets really took off after the UK’s new Chancellor, Kwasi Kwarteng, announced a budget that fused deep tax cuts and big public spending increases to stimulate economic growth.
Mr Boscher said that with wages rising at about 6% year-on-year, disposable incomes and economic growth would get a significant boost over the next six to 12 months, but markets and commentators are concerned that this would come with an ominous cost.
‘Although the Chancellor’s energy subsides will reduce headline inflation this winter – likely to peak around 11% compared with previous estimates of up to 20% – they will more likely add to underlying inflationary pressures over the longer term through increasing demand and further weakening sterling into a background inflationary environment,’ he said.
‘Markets now expect UK interest rates to peak around 6% next year, having priced in a figure closer to 3% as recently as early August.’
The pound dipped to a 50-year low against the dollar.
Mr Boscher noted similarities between the UK government’s tighter monetary policy and the strategy pursued by the Thatcher government in the 1980s, bargaining to increase interest rates to bring inflation back under control, and to encourage saving and investment.
‘Investment and productivity are absolutely key here, since the best way to increase potential growth in a non-inflationary way is through significantly boosting investment and productivity, which have both been well below par for the past decade or so,’ he said. ‘The current government believes that growth comes from businesses innovating and investing, which will ultimately benefit both the businesses themselves as well as their workers.’
Mr Boscher added that as the UK is primarily a consumer economy, so encouraging saving more and spending less may fail.
