Sterling continued its sharp decline yesterday as currency markets reacted to the worsening outlook for the UK economy and a slew of negative economic data.
Surveys showed consumer confidence mired at a four-month low in August as food prices rose ten per cent year-on-year. Other data showed activity in the services sector still weakening.
The pound fell to a 12-year low against a basket of currencies of the UK’s major trading partners and hit a renewed two-year low against the dollar at $1.77 in spite of news that the services sector had contracted at a slower pace than expected last month. Shares also tumbled, with the blue chip FTSE 100 index shedding 2.15 per cent to 5,499.
A survey by Nationwide showed consumer confidence in August remained at its lowest point since it began polling sentiment in 2005. The latest Purchasing Managers’ Index survey for the services sector, which makes up three quarters of the economy, also showed activity contracted again in the month with a headline reading of 49.2 per cent. Any reading below 50 indicates a fall in activity. It was however higher than July’s 47.4 reading, but economists said a recession was still inevitable.
“It would be premature to conclude that the economy is now going to avoid a recession. August’s rise could easily turn out to be a blip,” said Jonathan Loynes, economist at Capital Economic. Economists are increasingly convinced that interest rates will fall, perhaps before Christmas, as Britain flirts with its first recession since the early 1990s.