Fears of Liz Truss-style financial turmoil if Labour Left-wingers oust Keir Starmer

Markets could be thrown into turmoil with ‘loud echoes’ of the Liz Truss era if Keir Starmer is kicked out by Left-wingers, a top City economist has warned.

A worst-case scenario would see the pound plunge to its lowest level since the aftermath of the Truss debacle in 2022, and UK borrowing costs surge to their highest levels since the financial crisis.

The warning in a note from Simon French, chief economist at Panmure Liberum, came amid fresh speculation about a plot by Mayor of Greater Manchester Andy Burnham to return to parliament and unseat the Prime Minister.

Starmer’s dismal poll ratings have prompted talk of a leadership challenge after local elections next May. 

French said: ‘Despite a Parliament with still three and a half years to run, the chances of a Leftward pivot from the Labour Party are increasing and may come to a head next spring.

‘The likely reaction on currency and gilt markets has a wide spread depending on the characteristics of such a pivot.’

Floundering: Prime Minister Keir Starmer’s dismal poll ratings have prompted talk of a leadership challenge after local elections taking place next May

A worst-case scenario would see a new PM take no ‘pre-emptive mitigations’ to try to head off a market blow-up.

With the prospect of a spending and borrowing splurge, traders would be ‘likely to reprice UK assets to absorb a more inflationary public policy mix, a higher tax rate, and more gilt issuance’, French said.

‘Whilst this would come from the other side of the political aisle, this would have loud echoes of the ill-fated mini-budget in 2022 where an incumbent government performed an economic U-turn mid-Parliament to pursue a markedly different economic agenda to the manifesto presented to the electorate,’ he added.

Back then, UK bonds – known as gilts – sold off, pushing up yields demanded by investors. Higher yields mean higher borrowing costs for the Government.

The gilts slump also caused chaotic knock-on effects, threatening a meltdown of pension funds, before intervention by the Bank of England to stabilise the situation – and the ultimate collapse of Truss’s short-lived administration.

French’s projections suggest that, in a worst-case Left-wing takeover scenario next year, yields on five-year gilts could hit 5 per cent – a level not seen since the financial crisis in 2008.

And the pound could slump to $1.20 versus the dollar, which would be the lowest since 2023, when it was still recovering from the Truss chaos. At its lowest point in 2022 it had tumbled below $1.04.

French said he could not rule out a new Left-wing government taking the ‘naive’ approach that the same scenario would be unlikely to play out again.