Economists are warning that a weak government could slow the recovery and drive up government borrowing costs as financial markets add a premium for political risk.
Sterling fell for a third consecutive session yesterday, by 0.25 per cent, after tumbling 1.2 per cent on Friday following disappointing manufacturing figures.
Roger Bootle, at Capital Economics, said: “A weak coalition could undermine the economy by fostering uncertainty. Firms may not invest if they believe the government might change soon.”
Meanwhile, George Osborne has warned that Britain will face “fallout Friday” if Labour wins the general election with the support of the SNP, claiming that investment and business confidence would drain away.
He claimed that Labour’s agenda of higher taxes on wealth, looser targets for deficit reduction and a tendency to “meddle in markets” would damage Britain’s global reputation.
Labour responded by saying the chancellor was scaremongering and throwing away his reputation for fiscal credibility and sober economic management.
Market concerns about the economic costs of a hung parliament are growing two days before the most tightly contested general election in decades.
With Labour and the Conservatives neck-and-neck in the polls, concerns are mounting that a minority government and possible second election would bring months of political limbo.
There are fears that financial markets will start charging more for government debt in the event of a messy election outcome.
Bill O’Neill, the head of the UK investment office at UBS wealth management, said: “Any slippage on deficit reduction would get the attention of the markets.”
Alongside the high chance of an unstable outcome on Thursday, no party offers much reason for markets to cheer.
Labour would borrow up to £20 billion more than the Tories annually, posing questions about deficit reduction, while the Tory pledge for an EU referendum in 2017 has been cited by business as the single biggest risk to the economy.
Capital Economics analysis suggests that the economy tends to perform better under a government with a large majority.