Pound falls as Chancellor suffers growth setback

The pound fell yesterday as official figures showed a surprise reversal in growth from Chancellor Rachel Reeves raising fears of a slowdown.

Sterling fell half a cent against the dollar to just over $1.26, a two-week low, after the Office for National Statistics (ONS) said gross domestic product (GDP) contracted by 0.1 percent in October.

The pound sterling fell by more than half a cent against the euro, to just over 1.20 euros.

The monthly GDP drop was the second in a row and the first time it has fallen for two months in a row since the pandemic era in 2020.

It added to the risk that the economy could contract in the current fourth quarter of the year, economists said.

And with inflation expected to rise in the coming months, fears have arisen that Britain could be heading towards so-called “stagflation”, where the economy stagnates while prices soar. The latest GDP figures mean that the economy has only grown in one of the first four months since Labor came to power, and that GDP is 0.1 per cent lower than when Reeves and Sir Keir Starmer entered Downing Street.

However, hopes that the economy’s weakness could persuade the Bank of England to cut interest rates before Christmas at its final policy meeting next week are unlikely to be met. Market expectations for a cut next Thursday rose only marginally, from around 10 percent to 13 percent.

A survey by the Bank, which closely monitors public attitudes on inflation, suggested that keeping inflation low still poses a challenge.

The survey found that the public believes it will increase by up to 3 percent over the next year.

That was up from an expectation of 2.7 percent in the previous survey three months ago and the first time it has increased since August 2023.

October’s GDP drop was widely attributed to uncertainty ahead of the Budget, which was released later that month.

But for many companies, the policies announced by Reeves turned out to be even worse than feared, especially his £25bn raid on company National Insurance.

Companies say this will likely result in fewer jobs, lower wages, higher prices and less investment. That could mean, experts say, that the UK deteriorates further, as recent business surveys already suggest is happening.

Thomas Pugh, British economist at accountancy firm RSM, said: “Now that the economy has contracted for the second month in a row and inflation has risen back to 3 per cent, there is a risk that the UK is falling into of stagflation”.

Pugh said he expected the economy to “accelerate again toward 2025” now that the budget has been passed. But Sanjay Raja, chief economist at Deutsche Bank in the UK, said: “There is probably more bad news on the horizon.

“The risk of negative quarterly growth just increased.”

Paul Dales, chief UK economist at Capital Economics, said the likelihood of growth returning in November or December was “far from a given”.

Isaac Stell, investment manager at Wealth Club, said: “With more companies saying they will cut hiring and investment to deal with rising budget-related costs, the question will be: where will the growth actually come from?”