Sterling slides as all three sectors of British economy go into reverse

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By late morning sterling was down more than a cent (REUTERS)

The pound was on the slide once again today as markets took fright at worse than expected GDP figures that showed the UK’s output fell by 0.3% in April.

By late morning sterling was off around 1.1% to stand at $1.2186, the weakest level since mid-May as City economists digested the worse than expected figures from the Office for National Statistics (ONS).

Worryingly all three sectors of the economy — services, production and construction —  contracted in the month for the first time since January 2021.

The latest downward lurch in the value of the pound against the greenback spells bad news for drivers as energy markets are priced in dollars. It is likely to feed through to higher pump prices at forecourts over the coming days, sending average petrol and diesel prices ever close to the £2 a litre barrier. Last week the average cost of filling a typical family car with petrol passed £100 for the first time.

Barret Kupelian, senior economist at consultant PwC, said: “UK economic output has now reverted to levels last seen in November 2021, and is around 0.9% higher than pre-pandemic levels, compared to 1.3% higher earlier this year. For businesses this means the economic environment is even more challenging  as they will have to fight over a smaller pie to grow their revenues.”

Russ Mould, investment director at broker AJ Bell, said: “There looks to be precious little economic respite in sight with any boost from the Platinum Jubilee fading into the middle distance, energy prices remaining stubbornly high and another lifting of the price cap on gas and electricity still to come in October.

“While there has been some state support for households to cushion the blow of a cost-of-living crisis, many businesses, particularly smaller ones, are facing their own cost-of-operating crisis as they contend with big fuel bills, staff shortages, rising wages and supply chain problems. Expect calls for support for the corporate world to get louder.

“Investors are likely to remain jittery at least until the Fed has delivers its verdict on rates on Wednesday, with the Bank of England following suit a day later.”

However, some analysts pointed out that today’s GDP fall was made worse by the government’s winding-down of the test and trace programme.

Thomas Pugh, economist at consulting firm RSM UK, said: “April’s GDP data is not as bad as it looks. The drop in GDP was primarily driven by a 5.6% month-on-month drop in healthcare output, but consumer spending was resilient with output in consumer-facing services growing by 2.6% in April 2022.

“And while we still think the Monetary Policy Committee (MPC) will raise interest rates at its meeting on Thursday, the slump in GDP and the rising risk of a recession means the rise is significantly more likely to be 0.25% than 0.5%. We expect the MPC to tread cautiously with a series of 0.25% rises taking interest rates to 2%  by the end of the year, rather than big jumps, which could tip the economy into recession.”