Pound set to fall in ‘screeching turnaround’ as UK GDP numbers hammer | Personal Finance | Finance

The British Pound is facing a sharp drop after worrying new figures revealed the UK economy has shrunk, dealing a heavy blow to hopes for a prosperous Christmas. New data from the Office for National Statistics (ONS) show that the economy shrank by 0.1% in October. This follows a similar drop in September. This means the country isn’t making as much money or producing as many goods as it should be. This “contraction” (shrinking) is a major warning sign that the recovery we were promised has stalled.

Following the release, the pound slipped against both major currencies. The pound-euro exchange rate fell from 1.1410 to 1.1390, while the pound-dollar rate eased from 1.1396 to 1.1380. James Bentley, director at Financial Markets Online, said the outlook is gloomy just weeks before the holidays. He said: “Britain’s economy has been lit up, not with festive sparkle but by warning lights. Cooling has turned into contraction, and at this rate, the Christmas interest rate cut will get a sequel by February.”

The report shows that British factories are struggling. Mr Bentley pointed out that things have gone “from bad to worse”, with factory output falling by 0.7%. It is also bad news for the construction trade. Building work has slowed down, which is usually a sign that businesses are too nervous to spend money.

“Private sector housebuilding – the photo opp of choice for Chancellors – shrank by a humiliating 2.4%,” Mr Bentley said.

Even the “services sector” – which covers everything from your local shops and restaurants to banks – has stopped growing entirely.

With unemployment rising to 5%, the Bank of England is now under huge pressure to take action. Usually, high interest rates are used to stop prices rising (inflation). But now, the Bank needs to cut rates to get people spending again.

“The question now isn’t whether the Bank of England will cut interest rates next week, it’s how big will the cut be?” Mr Bentley asked.

He suggested we might see a “supersize” cut of 0.5%, rather than the smaller 0.25% change many expected. While lower rates help those with mortgages, it is often worrying news for savers.

Because the economy looks weak, the value of the Pound is dropping. After a good week against the US Dollar, Sterling has now “plunged deep into the red”.

He said: “Cue a screeching U-turn for the Pound, which had been on a winning streak against the Dollar this week. Sterling has plunged deep into the red.” Mr Bentley warned that UK equities are also “rattled”, meaning the value of shares and investments is shaky.

He added a grim warning for the New Year, suggesting that the recent tax-heavy Budget has made things worse.

He said: “If the data from the month before the Chancellor’s tax-raising Budget was this bad, how much worse will the November and December numbers look? Cheerio Christmas cheer.”