Soros: UK risks slipping back into recession

The coalition government’s emergency budget and harsh spending cuts risk driving the UK economy back into recession, warns veteran hedge fund manager George Soros.

Speaking on the sidelines at the World Economic Forum in Davos, Soros said: “I do not think they can be implemented without pushing the economy into a recession. My expectation is that it will prove to be unsustainable.”

Soros's warning comes as shock data from the Office for National Statistics released this week showed the economy contracted by 0.5% in the final three months of last year, confounding analysts’ expectations of growth and raising fears of a double-dip recession.

Soros indicates he has some sympathy with Mr Osborne’s plans, the Telegraph and the BBC report. “They may have been right in embarking on it,” he says. “The initial reaction has been very positive.” Bond markets have reacted favourable since the June Budget, despite the UK holding the worst deficit in the OECD.

He says fiscal stimulus in the UK was needed, but that stimulus measures targeting consumption would lead to further problems.

“You need fiscal stimulus, not necessarily for consumption but to improve competitiveness,” he says. “Too large a part of the stimulus went into consumption, which perpetuated the problem.”

While he concedes the UK government "may be right by embarking on [cuts], I think it will probably have to modify it when the effects are felt," he added.

Soros says the greatest threat to the UK economy is deflation, where rising debt and falling prices reinforce each other in a damaging spiral.

This "has been successfully fought off," Soros says, although the "balance is now tipping the other way", towards inflation.

He also warns the euro could “potentially fall apart,” although he thinks it unlikely this will actually happen, the BBC reports.

The euro is changing its current form, he says, with the permanent European Financial Stability Fund providing support.

However, he adds the single currency "effectively created divergence". “The euro is clearly here to stay, there is a clear commitment to the euro, but it could put into motion a two-speed Europe... that is going to be politically very disruptive,” Soros said.