It’s been a tumultuous year for the British pound. The FTSE 100 lost 5%, its value has fallen 15% against the dollar and has lost about a fifth of its value compared to the euro this year. After a flurry of industrial action, the pound has been hammered and weakened more than most, which is a big problem for the UK economy.
According to the Office for National Statistics, GDP in the UK declined by 0.2% in the third quarter of the year. This is the biggest three-month decline since 2007. But the pound did not get hit nearly as hard as the US dollar or euro.
The Bank of England raised interest rates by 75 basis points to 3%, the highest in a decade. However, economists warn that this is not enough to save the UK’s economy from recession. That’s because the pound is historically weak, which makes imports more expensive and makes them less competitive in the market. A weaker currency also puts the cost of fuel and food higher. Moreover, the government’s energy bill subsidies may not be enough to recoup growth.
The UK services sector contributed more to GDP than expected in October, boosting the economy’s performance. Nonetheless, the decline in the UK housing sector and continued industrial action could take its toll. As a result, the government’s Growth Plan is expected to help revive the economy and cut taxes.
Meanwhile, the Bank of England is preparing to raise interest rates again this week. If that happens, the pound could be pushed even lower. At the same time, the government’s “growth, growth, growth” plan is an ambitious stimulus package that includes cuts to taxes, increased investment and supply-side reforms to support businesses. All of these factors are intended to kickstart the moribund economy and to restore growth, but some say they aren’t enough.
In addition, the Bank of England’s decision to hike interest rates comes at a time when inflation is skyrocketing. Consumer price inflation is expected to be above 11 percent in the current quarter. Combined with a lack of data, this has been a major drag on the pound. Despite recent reports of progress, the pound is still lagging behind the US dollar.
On Friday, the pound dropped below $1.10, the lowest in more than four decades. However, the currency recovered to $1.16 after the country swapped finance and prime ministers. One analyst said the pound was “getting smoked” by the government’s debt-financed tax cuts package. Another noted that the pound was “a whipping boy” of the G10 foreign exchange market. Ultimately, the pound is likely to fall below $1.10 in the next six months, but it remains a viable alternative to the US dollar.
Despite the fall in the pound, the UK’s GDP beat its rivals in the third quarter. According to the government, the economy is now bigger than it was in 1984. And it is bigger than the average person would think.