International investors could soon get cold feet if the UK economy fails to show signs of recovery, the government has been warned.
This week the pound slumped to a 37-year low against the dollar, with market experts warning that the UK could be teetering on a sterling crisis.
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 £100 billion-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.”