Sterling bounces back as economy recovers
‘Avoiding recession is very plausible’
THE pound has rallied back above $1.17 amid hopes that Britain may dodge a recession.
Sterling climbed by around 1pc against the dollar after hitting a 37-year low of $1.14 last week.
The euro was also up against the greenback as the US currency eased following strong gains this year.
The rally in sterling came as figures from the Office for National Statistics showed the economy grew by 0.2pc in July following a 0.6pc slump in June.
Output was boosted by the Women’s Euro 2022 football tournament, which England hosted and won. The figures raised hopes that recession can be avoided – or at least shortened.
Daniel Mahoney, UK economist at lender Handelsbanken, said July’s return to growth combined with Prime Minister Liz Truss’s energy bill cap meant it was now ‘very plausible that the UK will avoid a recession in the next 18 months’.
Meanwhile, Germany faces recession as a dramatic rise in energy costs extinguishes the chances of recovery from pandemic lockdowns, according to the country’s leading economic think tank. The Ifo institute said it now expects the German economy to contract by 0.3pc in 2023 having previously forecast 3.7pc growth. It also bumped up its forecast for 2023 inflation by 6 percentage points to 9.3pc.
‘The cuts in gas supplies from Russia over the summer and the drastic price increases they triggered are wreaking havoc on the economic recovery following the coronavirus,’ said Timo Wollmershaeuser, head of Ifo’s economic forecasts.
The first quarter of 2023 will be particularly rough for consumers as energy suppliers adjust prices in response to high procurement costs, driving inflation to around 11pc, said the institute.
The German economy grew slightly in the second quarter, propped up by household and government spending
The UK isn’t completely out of the woods. July’s growth in output of 0.2pc fell short of experts’ predictions of 0.3pc as activity in the manufacturing and construction sectors continued to slow.
The return to growth fuelled some economists’ hopes that the UK will now dodge a recession, but others feared the lacklustre figures meant the country was already embedded in a downturn. Elizabeth Martins, senior economist at HSBC, said the economy had ‘largely stagnated since the start of the year, and there is a risk that it is already in recession’.
Defined as two consecutive quarters of contracting output, a recession would be recorded if the economy shrank again between July and September, following the 0.1pc decline between April and June. Experts said the disappointing figures for July underlined the need for a plan for growth – one of the key proposals put forward by Truss. She began last week by capping annual energy bills at £2,500 for the typical household.
Alice Hain, personal finance analyst at investment platform Bestinvest, said: ‘With the twoyear freeze in energy bills saving households £1,000 a year, the UK is expected to suffer a much milder recession than previously forecast.’
But Modupe Adegbembo, economist at AXA Investment Managers, said: ‘ Whilst the [energy bill] package is set to reduce headline inflation, the boost to growth it will provide leaves the Bank of England with more to do to ensure inflation returns to target.’