Pound on retreat as Britain heads for double-dip recession

Sterling fell yesterday as the third national lockdown triggered the largest decline in business activity since May – leaving Britain facing a double-dip recession. 

Having hit a two-and-a-half year high against the dollar of $1.3746 and an eight-month high against the euro of €1.1324 on Thursday, the pound fell as low as $1.3652 and €1.1217. 

The sell-off followed a flurry of bleak economic news as Britain continues to be battered by the Covid-19 pandemic. 

Sell-off: Having hit a two-and-a-half year high against the dollar of $1.3746 on Thursday, the pound fell as low as $1.3652

Research group IHS Markit said its index of activity in the UK economy – where 50 is the cut off between growth and decline – tumbled to 40.8 this month. 

That was its lowest level since May and suggested that the latest lockdown hurt the economy at the start of this year. 

Separate figures from the Office for National Statistics showed retail sales fell 1.9 per cent last year – the most on record – leaving the High Street in crisis. The ONS also said the Government borrowed a record £34.1billion in December – or more than £1billion a day – as the cost of coronavirus mounted. 

Borrowing in the first nine months of the fiscal year hit £270.8billion and the national debt now stands at over £2trillion. 

Chris Williamson, chief business economist at IHS Markit, said: ‘A steep slump in business activity in January puts the locked-down UK economy on course to contract sharply in the first quarter of 2021, meaning a double-dip recession is on the cards.’ 

Britain crashed into recession in early 2020 with the economy shrinking by 3 per cent in the first quarter of the year and by 18.8 per cent in the second. It grew by 16 per cent in the third quarter but tough new restrictions aimed at slowing the spread of the virus have derailed the recovery. 

IHS Markit said the services sector has been particularly hard hit as shops, bars and restaurants are closed. The index of activity in services fell to 38.8 while manufacturing clocked up a score of 50.3 – meaning industry continues to grow but only just. Simon Harvey, senior currency market analyst at Monex Europe, said the figures ‘will be a bitter pill for markets to swallow’. 

The pound has been rising steadily against the dollar and the euro since late last year as Britain closed in on a Brexit trade deal with the EU and began aggressively rolling out Covid vaccines. But hopes of an early end to lockdown are fading. 

Jane Foley, head of foreign exchange strategy at Rabobank, said weak economic data coupled with the ‘suggestion that schools may not open until April, with non-essential shops opening even later in England bodes poorly for the recovery story’.