Pound slides as fears mount for UK economy

Worries over the prospects for the UK economy led the pound to slide 5% against the US dollar in August.

Sterling sank again on Thursday morning, dipping below $1.16 on the currency markets.

Analysts said the fall reflects the darkening outlook for the economy, with consumers and businesses facing rising prices and soaring energy bills.

The Bank of England has predicted the UK will fall into recession towards the end of this year.

The weak pound means Brits travelling overseas will find their spending money will not stretch as far.

"Our economic prospects are not looking particularly good compared to the rest of the world," said Laura Lambie, senior investment director at Investec.

Ms Lambie said that recession fears were weighing on markets, with the investment bank Goldman Sachs warning this week that the UK could remain in recession until 2024.

A recession is defined as the economy getting smaller for two consecutive three-month periods.

Fears have grown over the prospects for the UK economy after figures showed it shrank between April and June, with businesses and households feeling the impact of rising prices.

Those concerns were fuelled on Thursday, with a new study suggesting the manufacturing sector shrank in August for the first time since May 2020.

Separately, a report by the Resolution Foundation think tank said typical household disposable incomes are on course to fall by 10%, or £3,000, over this year and next, which is called the "the deepest living standards squeeze in a century".

The cost of living crisis is set to be the biggest challenge facing the new Prime Minister.

Both Rishi Sunak and Liz Truss have come under pressure to outline how they would support households if they succeed in getting the keys to Number 10.

''Grim forecasts about poverty spreading across the UK this winter highlight the deepening woes for the UK economy", said Susannah Streeter, senior investment and markets analyst at Hargreaves Lansdown.

"This latest drop has rounded off a torrid month for the pound, which has fallen by more than 5% against the dollar in August."

The Bank of England raised interest rates to 1.75% in August, while forecasting that the UK economy would fall into recession this year.

But Ms Streeter predicts that the Bank of England might be forced to slow down rate rises in the coming months, given the cost of living crisis.

The pound's weakness is also a result of a strong dollar, analysts said.

The dollar is performing strongly due to US interest rate rises and because investors see it as a safer bet.

"The dollar has been exceptionally strong," Ms Lambie said.

"Also, the issues that we've had in Europe around energy do not have the same impact as the US, and I think economists are fairly agreed that the US will be the last to go into recession if they do go into recession at all, perhaps following the UK and Europe.

"So on both sides, from the sterling side and from the dollar side, that's really what has weakened sterling and strengthened the dollar."