Thomson, the company’s chief economist and a co-manager on the £440.3m Ignis Absolute Return Government Bond Fund, also said monetary policy is limited in its scope to reduce the risk this will create for the country’s growth prospects.
Chancellor George Osborne’s deficit reduction plan suggests that the 2013-14 and 2014-15 periods will involve more austerity than the current financial year. Given a backdrop of weak growth, this could threaten to choke off the country’s nascent recovery.
Thomson said: “The UK fiscal cliff is smaller than the US, but more certain. The chancellor has made it clear that the government will stick to plan A which envisages deepening fiscal austerity from the equivalent of 0.5% of GDP to 1.5% of GDP.
“The negative fiscal multipliers are expected to slow growth in the second half of next year.”
The economist also predicted that the Bank of England will boost quantitative easing (QE) by £25bn at its monetary policy meeting next week but said it is likely to hold off on any more extensions until the autumn of next year.
However, he argued that the Bank’s QE programme will have limited success in helping the country avoid the full impact of its fiscal cliff.
Speaking at the South Wales Chamber of Commerce last month, Bank governor Mervyn King highlighted that there are “limits” to what monetary policy can do. Monetary policy attempts to support growth by encouraging households and businesses to bring forward future demand – but King noted that “this cannot continue indefinitely”.
Thomson added: ”The governor is correct in his view that there is a limit to how long ultra-accommodative monetary policy can bring forward this deferred consumption.”
Projections made by the International Monetary Fund in its latest World Economic Outlook put UK GDP growth at 1.1% for 2013. Should the continuation of ‘plan A’ force the UK over its fiscal cliff, then this outlook could be pushed down even further and the country would face yet another year of close to flat growth.
