Billionaire investor George Soros, who reportedly made $1 billion selling the pound in 1992, said the U.K. government will have to rethink its budget deficit-cutting plan or risk pushing the economy back into recession.
“They will probably have the sense that they will have to modify it when the effects are felt,” Soros told reporters today at the World Economic Forum’s annual meeting in Davos, Switzerland. The plan cannot “possibly be implemented without pushing the economy into a recession.”
Britain’s economy unexpectedly shrank 0.5 percent in the final three months of 2010 as the coldest December in a century hampered services and retailing, data showed yesterday. That suggests the recovery faded even before Prime Minister David Cameron’s government implements the largest fiscal squeeze since World War II to tackle the nation’s record deficit, a plan Soros today called “unsustainable.”
How fast governments should be restoring fiscal order was a theme of the first day of the Davos conference. Chief executive officers and economists criticized President Barack Obama for not acting quickly enough to reduce the U.S.’s $1.2 trillion deficit even after yesterday revealing almost $500 billion in fresh savings measures.
“We need a heck of a lot more action” in the U.S., said James Turley, chief executive of Ernst & Young LLP.
Cameron’s government reacted to the first shock of its eight-month-old coalition by sticking with its vow to eliminate the deficit. “There is no need for a Plan B if Plan A is right and sensible, as it is,” Business Secretary Vince Cable told the British Broadcasting Corp.
That approach won backing from Angel Gurria, secretary general of the Organization for Economic Cooperation and Development, who told the BBC today that the government “should stay the course.”
Nouriel Roubini, the chairman of Roubini Global Economics LLC who predicted the recent financial crisis, said in Davos that the latest U.K. data “suggest the risk of a double-dip or long-term stagnation are not done forever.”
Speaking on the same panel, Martin Sorrell, CEO of advertising firm WPP Plc, nevertheless praised the U.K. for acting faster than the U.S. to cut its deficit. “At least they’re trying to deal with the issue,” Sorrell said.
Bank of England Governor Mervyn King said yesterday the fourth-quarter data pointed to a “choppy” recovery, comments echoed by Cameron in Parliament in London today when he said growth is likely to be “choppy and difficult.”
The prime minister made the deficit, which grew to 11.1 percent of gross domestic product in the last fiscal year, his top priority after Standard & Poor’s threatened to lower the U.K.’s AAA credit rating in May 2009. S&P affirmed the rating after the government presented the fiscal plan in October.
Chancellor of the Exchequer George Osborne said that month that eliminating most of the deficit by 2015 was essential to prevent a loss of investor confidence. Both Osborne and Cameron are scheduled to attend the Davos conference.
Soros is chairman of Soros Fund Management LLC and his 1992 bet was that Britain would fail to keep its currency in a European exchange-rate system that pre-dated the euro. Other successful trades included a bet that the deutsche mark would rise after the collapse of the Berlin wall and a wager that Japanese stocks would start to tumble in 1989.
He also said today that European policy makers must address their two-speed economy or risk the euro collapsing, although he said that is unlikely to occur. He was speaking at the launch of a new economic research group which he and former Federal Reserve Chairman Paul Volcker will help sponsor.
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