Pound falls as private sector growth slows and recession fears mount

The pound fell against the dollar for the seventh day in a row yesterday in its longest losing streak since the start of the pandemic.

As economic data reignited recession fears, sterling dipped by as much as half a cent to almost $1.28, having hit a 15-month high of more than $1.31 earlier this month.

The latest slide came after closely-watched figures from S&P Global showed growth in Britain’s private sector has slowed sharply to its weakest pace for six months.

Sterling slips to $1.28, having hit a 15-month high of more than $1.31 earlier this month

The purchasing managers’ index (PMI) of business activity – where 50 is the cut-off between expansion and contraction – fell to just 50.7.

It was the lowest reading since January and down sharply from 52.8 in June. Economists had expected a milder decline, to 52.4.

The reading puts pressure on the Bank of England – led by Governor Andrew Bailey (pictured) – to slow the pace of interest rate hikes when officials meet next week.

Rates are now expected to be increased by just a quarter percentage point rather than seeing a repeat of the bumper half-point rise in June.

Sterling’s decline – the longest losing streak since March 2020 – reflects diminishing expectations about how high rates will ultimately have to go in order to tame inflation.

Rates have been rising sharply, from 0.1pc in December 2021 to 5pc today, as the Bank of England battles to rein in inflation.

Traders had been expecting them to pass 6pc but now markets are betting that they are more likely to peak at around 5.75pc.

Figures last week showed that inflation had fallen more sharply than expected, from 8.7pc to 7.9pc, in June.

Samuel Tombs, chief UK economist at Pantheon Macroeconomics, said the PMI data strengthened the case for the Bank to revert to raising rates by a quarter percentage point ‘rather than unleash’ a half-point increase.

Britain has avoided a recession this year despite the cost of living squeeze.

But the slowdown in business activity this month suggests higher interest rates are hurting. ‘July data highlighted a considerable slowdown in business activity growth across the UK private sector economy,’ the PMI report from S&P Global said.

Thomas Pugh, an economist at RSM UK, said it ‘suggests that the economy is starting to buckle under the weight of the surge in interest rates and exceptionally high inflation’.

He added: ‘Momentum and resilience in the private sector is starting to falter, and it is not difficult to see the economy slipping into recession in early 2024 as the impact of interest rate hikes continue to feed through into the real economy.’

The PMI figures showed that orders were flatlining and backlogs of work falling sharply.

In the services sector, companies were affected by a slowdown in the housing market and spending cutbacks by business and consumers.

Across the private sector, expectations for the year ahead weakened as companies worried about the impact of higher borrowing costs on demand.

Meanwhile the rate of inflation for prices charged by firms fell to its lowest for two-and-a-half years, in what may be seen as a boost for the Bank of England.

The fall in the pound diminishes British tourists’ spending power as they head off on holiday. It has also lost ground versus the euro. But it is still in a much better position than last autumn when sterling fell to less than $1.04 against the dollar.

EUROZONE SLAMS INTO REVERSE

A FASTER-than-expected fall in business activity across the eurozone has raised fears of a recession on the Continent.

The purchasing managers’ index (PMI) reading of 48.9 was an eight-month low, and down from June’s 49.9. Economists had expected a fall to 49.7.

A reading that is below the 50-mark points to a contraction.

The decline was seen across the eurozone with business activity shrinking in both Germany and France, which are the bloc’s biggest economies.

It will pose questions for the European Central Bank, which is due to announce its latest rates decision this Thursday.

It has been raising interest rates to try to tame inflation and the latest data suggests that is starting to take its toll on consumers.

Paolo Grignani of Oxford Economics said: ‘Today’s data suggest the risk of a small contraction in eurozone GDP in Q3 is increasing.’

A separate PMI reading yesterday from the US, the world’s biggest economy, pointed to growth shrinking to its weakest pace in five months.

This post first appeared on Dailymail.co.uk