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UK resilience unlikely to last, Brevan Howard warns

Hedge fund warns that the UK's widening budget deficit has the potential to derail George Osborne's austerity plan.

UK resilience unlikely to last, Brevan Howard warns

The UK's outlook will remain intertwined with the eurozone's, according to hedge-fund management group Brevan Howard, and the widening budget deficit threatens to derail George Osborne's austerity plan.

Although yesterday's job figures showed a slight easing in the headline unemployment rate from 8.3% to 8.1% over the three months to May, activity fell sharply in May and recovered only slightly during June.

UK shifts down a gear

And while the UK is not at the heart of the sovereign debt crisis sweeping the continent – a factor motivating the likes of Société Générale to recycle its US bets into the UK – managers at the helm of Brevan Howard's BH Macro fund are concerned that along with the slide in factory activity, the country's construction and services sectors have shifted down a gear too.

'The UK is unlikely to diverge too far from the euro area, given its close trade and financial links,' the managers told investors. 'As such, the renewed worries over the future of the euro area growth are taking their toll on the UK.'

Critics of chancellor Osborne's austerity drive say it is failing to get the recovery back on track, and earlier this summer the International Monetary Fund (IMF) said a 'Plan B' may be needed if UK growth falls any further. 

On Tuesday the IMF issued its latest update in which it downgraded forecasts for Britain's growth more than any other developed economy, fearing an expansion of just 0.2% this year and 1.4% in 2014, down from previous predictions of 0.3% and 2%.

Fears over mounting debts

Although the IMF warned that these expectations may be optimistic, it refused to call for a reversal of Osborne's strategy. Brevan's managers, however, feel that measures unveiled by the Bank of England (BoE) aimed at improving growth will only help at the margin and warned of the impact further down the line if Britain's debt grows.

Brevan's team said: 'The UK labour market held up surprisingly well in the first half of 2012, but this resilience is unlikely to last.

'The BoE announced £50 billion of additional quantitative easing in July. The fact it was a modest £50 billion rather than a more aggressive £75 billion reflects, in our view, the fact that the simultaneous introduction of so many other stimulus measures reduced the need for additional easing at the margin. 

'On the fiscal side, last year's weak growth is starting to take its toll on the budget deficit, which is off track relative to earlier official forecasts. At some stage, this may challenge the government's "stick with the plan" austerity policy.'

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