Sterling has slipped following news that the economy shrank unexpectedly in November, extending earlier losses against the dollar.
The UK’s gross domestic product (GDP) contracted 0.3 per cent during the month as the manufacturing and production sectors declined more than expected. The figure was expected to be flat.
However, the economy grew 0.1 per cent overall during the three months to November, according to figures from the Office for National Statistics (ONS), boosted by a stronger than expected performance in previous months.
Having already slipped below $1.30 ahead of the GDP announcement, the pound was around 0.55 per cent down at $1.2985 by early afternoon.
Sterling has dropped two per cent in the first two weeks of 2020, and is on track for its fifth consecutive day of losses.
November’s figures mark the biggest drop in output since April and the fourth consecutive month without growth, with zero GDP growth in October following contractions in the previous two months.
Political uncertainty weighed on businesses and consumers late last year before the Conservatives secured a decisive victory in the General Election on 12 December, helping ease concerns over when the UK would leave the EU.
Responding to the GDP figures, Chancellor Sajid Javid said: “Uncertainty has held our economy back for too long. We are getting Brexit done so we can move on and chart a new course for our economy.”
“In my Budget on 11 March we will lay the foundations for a decade of renewal that will unleash Britain’s potential by levelling up across our great country,” Javid added.
“The UK economy stagnated at best in the fourth quarter of last year as heightened political uncertainty, Brexit risks and weaker global demand all colluded to dampen spending by both business and households,” said IHS Markit’s Chris Williamson.
Production declined 1.2 per cent during November , while manufacturing dropped 1.7 per cent. Services shrank 0.3 per cent, with construction and agriculture grew 1.9 per cent and 0.1 per cent respectively.
Analysts had been expecting GDP to remain flat while manufacturing and industrial production were expected to drop 0.3 per cent and 0.1 per cent respectively.
“Today’s data confirmed that the UK economy remained in the doldrums last autumn,” said PwC chief economist John Hawksworth.
Hawksworth highlighted that the data “relates to a period of heightened economic and political uncertainty last autumn due to Brexit and the General Election”.
“It is too early to say for sure if economic momentum will pick up in the new year now the political situation is clearer,” he added.
“Following the December General Election and the greater near-term clarify around the UK’s secession from the EU at the end of January, markets might be willing to put a little less emphasis on today’s GDP disappointment,” said Brooks Macdonald investment strategist Matthew Cady.
“Nonetheless, the weaker GDP print chimes with the Bank’s recent cut to both growth and inflation forecasts. It will also keep a lid on Sterling, which is currently trading down below 1.30 against the US dollar.”
A Bank of England policymaker hinted over the weekend that he could vote for an interest rate cut at the end of this month if GDP data does not show the economic growth picking up.
“Personally I think it’s been a close call, therefore it doesn’t take much data to swing it one way or the other,” Gertjan Vlieghe told the Financial Times.
Read more: Bank of England rate-setter hints at cut
Vlieghe told the paper he would seriously consider voting to cut the BoE’s main rate from 0.75 per cent to 0.5 per cent, making him the third Bank figure in a week to float the idea of a cut.
Fellow monetary policy committee member Silvana Tenreyro said last week that her “inclination is towards voting for a cut in rates in the near term,” while outgoing BoE governor Mark Carney said last week central banks could cut rates if economic weakness continued.
Two further BoE policymakers — Michael Saunders and Jonathan Haskel — already support a rate cut.