UK in Deep Recession, Pound Drops

123jump.com Staff
11 Feb, 2009
New York City

The British pound dropped against euro, yen and dollar as the Bank of England lowered its estimate of inflation and economic growth. The bank now estimates inflation to drop to 0.5% and economy to shrink at 4% annual rate in the first quarter. The pound continues to trade weak.

[R]1:00PM New York, 6:00 London – The Bank of England offered a gloomy forecast for the UK economy and estimated the economy to contact 4% in the twelve months ending in June of this year.[/R]

UK stocks trade mixed with losses in banks on weakening confidence in credit markets, and gains in Rio Tinto and Reckitt Benckiser. Lloyds declined 4% and the Royal Bank of Scotland fell.

Reckitt Benckiser full year profit before tax rose 20% to 1.47 billion pounds in 2008. This represented an increase in profit of over 20%.

The pound falls against the dollar, euro and yen on the continued worries of weak economy and fragile financials. The pound declined 1.2% to $1.4369 and against the euro declined 0.8% to 89.485 pence. UK two-year gilts fell 31 basis points to 1.33% and on 10-year note declined 23 basis point s to 3.62%.

The jobless rate in the UK also touched a record peak of 6.3%, the highest in ten years.

Market sentiment

In London FTSE 100 Index closed higher 21.18 or 0.50% to 4,234.26. Of the Index shares, 43 rose, 56 declined and 3 traded unchanged.

Rand Gold led advancers gaining 6.7%, followed by gains in Reckitt Benckise of 6.5% after the company reported strong earnings, in Xtrata of 3.3%, in Amlin of 2.6% and in RSA Insurance of 2.6%.

Llyods Banking led decliners with a loss of 6% as the US bank plan failed to instill market confidence, followed by losses in Aviva of 2.1%, in Prudential Plc of 2.1%, in Thomas Cook of 4% and in Barclays of 3.9%.

Pound slides

The pound lost against the dollar, euro and yen after the Bank of England painted a bleak financial outlook for the UK economy on the back of growing skepticism about the US bank plan.

The Bank of England said that it will consider easing monetary policy and increase money supply to encourage spending. The gloomy market conditions are increasing flow of capital from U.K.

UK Recession

Mervyn King, governor of the Bank of England warned that the economy was in “deep recession.”

King also warned that cutting interest rates below their record low of 1% will not stop the downtrend in the economy. The monetary authorities will consider unconventional measures to stimulate the economy, including increasing liquidity in the financial system.

King predicted that the economy will fall steeply in the first half of the year and likely to contract between July 2008 and June 2009 by 4%.

Unemployment spike

The Office for National Statistics reported that the unemployment rate in the UK reached 6.3%, the highest level since 1998.

According to the agency’s report, between October and December 2008, the number of jobless people surged to 1.97 million.

In January alone, the number of people on unemployment benefits increased by 73,800 to 1.23 million.