Friday 9 August 2019 1:52 pm

Sterling spirals to near $1.20 as UK economy comes close to recession

Sterling has tumbled to fresh two-year lows after official figures showed Britain’s economy contracted in the second quarter, raising fears of a recession and adding to no-deal Brexit worries.

Read more: Sterling to tumble further as no-deal Brexit worries intensify

The pound had fallen 0.6 per cent against the dollar by 1.45pm to buy $1.207, sliding past the two-month low of $1.208 set at the start of the month. 

Against the euro it had fallen 0.7 per cent, meaning a pound bought €1.077, pushing up costs for Britons heading to the continent for their holidays.

The FTSE was boosted by the falling pound but had nonetheless fallen 0.1 per cent to around 7,280 on a day of European stock market weakness.

The contraction of the economy was driven by the unwinding of stockpiling that took place around the original Brexit date of March as well as a global slowdown amid heightened trade tensions.

It has added to traders’ aversion to the UK’s currency. Sterling has tumbled over 2.7 per cent against the dollar since Brexiter Boris Johnson became prime minister on 24 July.

Traders are increasingly factoring in the rising chances of a no-deal Brexit, which most think would be economically damaging. Johnson has said Britain will leave the European Union on 31 October “come what may”.

Recession fears

The fall in Britain’s GDP “has raised concerns that a recession in the UK is on the way if it’s not already here,” said Ruth Gregory, senior UK economist at Capital Economics.  

She said the inversion of the UK government bond “yield curve” – meaning yields on longer-dated bonds are lower than on shorter-dated ones, implying short-term risk is higher – added to recession fears.

“In the UK, a yield curve inversion has preceded all three recessions over the last 40 years,” she said. Two consecutive quarters of negative growth amount to a technical recession.

Garry Young, economist at the National Institute of Economic and Social Research, said: “There is a significant risk that the economy is already in a recession that began in April.”

He said growth “is set to remain weak in the third quarter in the face of a global slowdown and continuing Brexit-related uncertainty”. 

Rehan Ansari of foreign exchange provider Caxton FX said: “Today’s figures will mount further pressure on the pound as the market evaluates whether this will warrant an adjustment to monetary policy.”

“Any loosening in policy at current levels will only drive sterling lower.” Lower interest rates would make pound-denominated assets less attractive.

The UK’s economic performance “would have been worse without the devaluation of the pound that provided a cushion,” said Jordan Rochester, foreign exchange strategist at Nomura. 

“But you can’t shrink to success. If the pound were to keep on falling at this rate, the inflation potential would bite into consumers’ pockets with the cost of energy and goods likely to rise.” 

Oliver Brennan of investment service TS Lombard said there is no “unambiguously” positive outcome for sterling. “The best markets can now expect is no no-deal at the end of October.”

Read more: Pound hits lowest level against global currencies since 2016

“This brings with it the risk of a general election by year-end, so the upside to GBP is limited by the uncertainty which such an event brings.”

(Image credit: Getty)