Sterling fell to its weakest level since late 2020 on Friday as storm clouds gathered over the UK economy, with falling high street sales, plunging consumer confidence and rapidly cooling business activity.
The combination of weak economic data has added to pressure on the Bank of England to control inflation without generating a recession. Andrew Bailey, BoE governor, said he hoped that the central bank could still pull off a soft landing.
But Bailey warned that “it is a narrow path” and the BoE was dealing with the opposing forces of a strong labour market adding to inflation and risks of a recession caused by higher food and energy prices squeezing household incomes.
The cautious words of the BoE governor contrasted with the more hawkish comments on interest rates this week from Jay Powell, chair of the Federal Reserve, who also faces surging inflation but without the same threat to US incomes.
The contrast between US data, which have been strong, and softening UK data sent sterling sharply down on Friday. By the close of trading in London, the pound was down 1.44 per cent against the US dollar at $1.284, the lowest level since late 2020.
Sterling initially plummeted on weak retail and consumer confidence figures. The volume of high street sales fell 1.4 per cent in March, the Office for National Statistics said, worse than the 0.3 per cent drop forecast in a Reuters poll and the second consecutive monthly decline.
Separate data released on Friday by the research company GfK showed that, in April, UK consumer confidence plunged to a near all-time low since records began in 1974, reflecting the impact of the cost-of-living crisis.
Thomas Pugh, economist at the consultancy RSM, said the retail data were the first official sign of the toll of high inflation on consumer spending and the economy. He warned of “worse to come” over the next few months, with the cost-of-living crisis likely to deteriorate in April because of a jump in energy bills and taxes.
For sterling, “this is like a dam breaking”, Kit Juckes, an analyst at Société Générale, said of the retail figures, adding that the 1.5 percentage points of interest rate rises anticipated by the market for this year now looked unrealistic. With the pound having dropped below $1.30, the next likely target was $1.25, he said.
Later on Friday morning, the weaker data were reinforced by a flash purchasing managers’ index, compiled by S&P Global, also suggesting that rises in energy and food prices were rapidly cooling activity in the economy. The index fell from 60.9 in March to 57.6, the lowest reading since January and below economists’ expectations.
The biggest problem noted by the survey was a drop-off in the momentum of new business, with companies reporting slower consumer demand.
“Orders received by manufacturers have almost stalled, driven by an increasing loss of exports, and growth of demand for services has slumped to among the weakest since the lockdowns of early 2021,” said Chris Williamson, chief business economist at S&P Global.
The ONS retail sales data showed that online sales were hit particularly hard as households cut back on discretionary spending. Sales slipped 7.9 per cent in March compared with the previous month, the largest monthly fall since January 2001.
Fuel sales also fell substantially, by 3.8 per cent, with evidence suggesting that some people reduced non-essential journeys following record-high petrol prices.
The data “surely quashes any remaining chance that the Monetary Policy Committee might raise the bank rate by [half a percentage point] next month, though a [quarter-point] hike still looks likely”, added Samuel Tombs, economist at Pantheon Macroeconomics.