Pound Slumps and UK Economy Shrinks: Recession Ahead?

Before the recent general election, the UK’s economy shrunk approx. 0.3%. Also, on the back of recent hints regarding BoE cuts, the pound has slumped.

Analysts had originally predicted that the economy would continue to flatline at 0.1% growth, all the way into November 2019, as had been in previous months. However, the Office for National Statistics (ONS) says the MoM drop happened as a consequence of fall shorts in the production and services sectors. A fall in the pound has consequently led to overall pessimism when it comes to a pending recession.

31st January is the official Brexit deadline, and somehow the UK has managed to avoid recession, but slow growth is pushing the UK in this direction.

In an interview with the Financial Times, Gertjan Vlieghe, of the BoE Monetary Policy Committee, said he would vote for lower interest rates if data doesn’t show the economy picking up. Markets commentators also believe increasing hints that the Bank of England will cut interest rates is likely to prompt investors into overseas financial assets.

Nigel Green, chief executive and founder of deVere Group said: “This is the third senior Bank of England official within a week who has hinted that a rate cut could be imminent.

“In direct response, the pound has come under pressure, as you would expect when relative interest rate expectations change, and it has surrendered its $1.30 level.”

He continued: “The Bank appears to be confused about which risk to fear most.

“Is it a recession and deflation, caused by a no-deal Brexit at the end of this year and decreasing corporate investment over last few years?

“Or is it an overheating economy and inflation caused by a wave of relief if an EU trade agreement is signed that offers minimal disruption to business, combined with a splurge of government borrowing to pay for the Prime Minister’s increased spending plans.”

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