Pacific Investment Management Co., manager of the world’s biggest bond fund, said Chancellor of the Exchequer George Osborne must stick to his budget-reduction plans even with the risk of “economic difficulty.”
Pimco favors short-dated gilts, or those maturing within seven years, on bets that the Bank of England will resume debt purchases to bolster “weak” growth caused by the spending cuts, said Michael Amey, executive vice president for U.K. fixed income at Pimco in London. The government’s Comprehensive Spending Review, intended to tackle the nation’s record deficit, will be presented by Osborne to parliament tomorrow.
“We have a double-digit government deficit, we have a stated plan to deal with that problem, and we want to see the government keep to the message,” Amey said in an interview. “The one thing the market would be wary of is a change in plan this early on. There’s clearly concern over the profile of growth going forward. The government should not change the game plan at the first sign of difficulty.”
Osborne says measures to eliminate most of the 156 billion- pound ($246 billion) deficit by 2015 are essential to prevent a loss of confidence from investors. The budget deficit was 11.1 percent of gross domestic product in the year through March, almost four times the European Union limit. The Chancellor said in June he expects borrowing to fall to 1.1 percent of GDP in 2015-2016.
Reports this month are signaling the economic recovery is stumbling after the British economy grew at the fastest pace in nine years in the second quarter. A manufacturing index fell to a 10-month low in September as export orders declined, data from Markit Economics and the Chartered Institute of Purchasing and Supply showed on Oct. 1. U.K. house prices plunged last month by the most since at least 1983, the Halifax division of Lloyds Banking Group Plc said Oct. 7.
“There is a high probability that the Bank of England will engage in a further round of quantitative easing, which will support the short end of the market,” said Amey. “We live in a world of high uncertainty. Undoubtedly there is a risk that growth turns out weaker than expected. Yield protection is less clear cut in the longer part of the market.”
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