Business leaders sounded the alarm over a damaging anti-growth lurch to the Left as Sir Keir Starmer’s rivals circled.
Bosses fear if Angela Rayner, Andy Burnham or Ed Miliband replaces him they will hike taxes and borrowing, piling even more pressure on firms and households as well as public finances.
As Sir Keir clung on, the boss of Barclays became the latest bank chief to plead for ‘stability’ amid the turmoil in Westminster.
Hugh Osmond, the former Pizza Express boss, said it was ‘obviously’ a worry that a Left-wing replacement could result in damaging consequences.
Mr Osmond said that one potential candidate, Health Secretary Wes Streeting, ‘might be an improvement’ but added: ‘Rayner or Burnham would be a disaster’.
And Sir Martin Sorrell, chief executive of marketing firm S4 Capital, said there was a ‘possibility’ of a lurch to the Left which could rattle markets.
‘Don’t think the bond vigilantes will like or tolerate it,’ he said – referring to traders who target countries whose public finances look vulnerable.
Business fears a dangerous lurch to the Left if Angela Rayner replaces Keir Starmer
Economists fear that markets would give such a move the thumbs down – resulting in a sell-off of UK government bonds – known as gilts – that would push up the cost of borrowing.
And banks are also worried, with Barclays chief executive CS Venkatakrishnan, known as Venkat, yesterday called for a focus on growth in an echo of comments made by Natwest boss Paul Thwaite a day earlier.
Asked what he would say to Labour MPs plotting to replace the PM, Venkat said: ‘It is really important for the country to have growth.
‘From the point of view of businesses and financial markets and the financial industry, what we’d like to see is stability and predictability. Those are the things we look for in the short to medium term, driving long term growth and productivity.’
The comments came after gilt markets and the pound wobbled on Monday as Sir Keir’s position crumbled over the weekend.
Markets stabilised later as the PM’s Cabinet gave him their public backing but experts fear there could be more turbulence to come as potentially disastrous local elections in May near and speculation over the Labour leadership continues.
Simon French, chief economist at City investment bank Panmure Liberum, said: ‘We think one possible outcome is that a Left-wing caucus of the Labour Party successfully engineer a change of the party’s leadership.’
That would trigger ‘an increase in public sector borrowing, lower growth, and higher inflation’.
Mr French said a takeover by Ms Rayner or Mr Miliband could see a surge in ten-year borrowing costs to above 5 per cent.
Small movements in these borrowing costs, or gilt yields, can – if sustained – add billions to the cost of financing public spending.
On Monday, ten-year gilt yields rose sharply to more than 4.6 per cent but by yesterday had stabilised at around 4.5 per cent. Britain’s borrowing costs are already the highest among the G7 group of advanced nations. But they have not been as high as 5 per cent since the global financial crisis in 2008.
Mr Miliband gave a taste of the potential leftward shift to come should he take over when he told Sky News yesterday: ‘For too long, this country has been run for the wealthy and powerful and that needs to change.’
Asked if that had changed under the current Labour government he said ‘not enough’, implying that he may double down on the party’s attacks on wealth creators that is already seeing entrepreneurs flee the country.
Modupe Adegbembo and Mohit Kumar, economists at investment bank Jefferies, said there could be a ‘knee-jerk rise’ in gilt yields should a Left-wing challenger emerge as well as further weakness in the pound and volatility in the UK stock market.
In a note to clients, they said: ‘Even without a formal leadership challenge, instability is already dampening sentiment and reducing policy clarity.’
Neil Wilson, UK investor strategist at Saxo Bank, said the forthcoming Gorton and Denton by-election ‘could kickstart another bout of volatility’.
The leadership turmoil threatens to worsen the dismal economic performance already being seen under the current government – with unemployment rising, growth sluggish and inflation the highest in the G7.
Ruth Curtice, boss of the Resolution Foundation – Labour’s favourite think-tank – said that while the upheaval in Westminster may seem distant from ordinary people’s lives, the party’s economic failure is likely to have contributed to the turbulence.
‘Perhaps there is in fact some connection,’ she said. ‘The loss of trust in politics and politicians is not after all just about the behaviour of some of those who wield power.
‘It is the combination of those transgressions by some with the lack of progress delivered by the system as a whole. Britain is not a nation at ease.’
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