As further reaction to the coalition government’s spending review is published, an investment strategist calls the review the biggest ‘macro risk’ to the UK economy.

Sterling fell to a six-month low against the Euro in morning trading on 21 October, which analysts put down to a fall in UK retail sales of 0.2 per cent in September, raising the prospects of further central bank economic stimulus to boost the economy.

Currency exchange firm Caxton FX said the Comprehensive Spending Review (CSR), minutes from the recent Bank of England (BoE) monetary policy committee meeting and data all pointed to the predicted ‘stalling recovery’.

Senior analyst at Caxton FX Duncan Higgins said: “The problem for the pound is the consistent speculation about quantitative easing. Any currency that has that prospect hanging over it is likely to underperform.”

Higgins said the different attitudes to the euro and pound correlated with the actions by the European Central Bank and BoE, with the BoE holding out the prospect of further quantitative easing and the ECB considering exit strategies from emergency stimulus measures.

Ted Scott director of UK strategy at F&C Investments said the spending cuts announced by George Osborne on 20 October accounted for 75 per cent of the reduction in the public finance deficit.

Osborne told parliament that the measures to reduce spending in May had brought the UK ‘breathing space in the sovereign debt storm’ while the CSR would bring Britain ‘back from the brink.’

However, Scott said the size of the proposed costs would lead to negative contributions from government to UK economic growth and therefore posed the biggest large-scale risk to the economy.

He said the economic impact would be felt once departments specify how they will spend their reduced budgets.

“With little in the review that is different from expectations, the main question remains whether the economy will be strong enough to withstand the proposed cuts and prevent a relapse into recession.”

Scott said the economy was growing at a rate below that normally associated with a deep recession which reflected the indebtedness of the private sector and the banks reluctance to extend credit.

While the spending review leaves little room for manoeuvre, Scott said the coalition government was under pressure to prevent a credible public finances plan to prevent changes to the government credit rating and increased costs of borrowing.

“The review will satisfy the rating agencies as it has delivered what it promised at the time of the emergency Budget in June. The gilt market’s initial reaction was also one of approval as yields remained low with the benchmark 10 year gilt staying below 3 per cent.”

© Fair Investment Company Ltd