The pound has fallen to a new two-year low against the US dollar, and a seven-month low against the euro, as uncertainty about the UK economy and recession concerns have increased.

UK GDP shrinks in March as consumers cut spending

According to the latest data from the Office for National Statistics (ONS) released on Thursday, Britain’s economy contracted in March as spending in shops dropped sharply due to the rising cost of living, including higher energy bills. Activity fell by 0.1% with spending in shops experiencing a significant drop.

The Chancellor, Rishi Sunak, said: “The UK economy recovered quickly from the worst of the pandemic and our growth in the first few months of the year was strong, faster than the US, Germany and Italy, but I know these are still anxious times. Our recovery is being disrupted by Putin’s barbaric invasion of Ukraine and other global challenges but we are continuing to help people where we can.”

The wholesale and retail trade sectors suffered the most, while the car sector also experienced falling sales. The fastest growth was seen in human health and social work activities.

Business Investment

UK business investment fell by 0.5% in the first quarter of 2022, as companies saved capital instead of spending spending on new projects.

Martin Beck, chief economic advisor to the EY ITEM Club, said: “With the consumers feeling the pinch and the Government tightening its purse strings, the onus is on companies to step up and invest more before the super deduction ends next year. But with business investment having fallen again in Q1 2022, the year has got off to a disappointing start in that respect.”

NIESR principal economist Rory Macqueen underlined the decline in consumer confidence which resulted in the drop in retail and wholesale. As he noted, “Falling business investment in the first estimate for the first quarter is a concern: with the government’s tax ‘super-deduction’ expiring in under a year we still still see little sign of a recovery from the Covid shock.”

Pound outlook

Economists have warned that the pound will remain weak, and today’s report adds to concerns about the economic outlook. With economic growth slowing, inflation continuing to rise, and Brexit looming in the background, the pound is expected to remain under pressure.

The UK’s political uncertainty and rising inflation will keep the pound vulnerable. Gerard Lyons, chief economic strategist at Netwealth warned that “At this rate a self-made sterling crisis could be next. Having wrongly eased aggressively when growth was recovering and inflation was rising last year, the Bank now continues to hike as it forecasts a sharp slowdown and likely recession ahead.”

A lower pound might attract tourists to the UK and make UK exports more competitive. On the other hand, any boost to the pound could prove be temporary.

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