The British pound dropped to a two-year low after the Bank of England slashed the UK’s growth forecasts yesterday, as it also forecasted inflation to exceed 10 per cent by the autumn. Analysts and investors are now expecting a slower pace of rate rises in what looks increasingly likely that the economy will be heading into a recession – or even more likely, a period of stagflation.

The currency dropped 2.3 per cent against the dollar yesterday, falling to $1.234, its lowest point since June 2020.

This was the largest daily fall since the outbreak of the Covid-19 pandemic in March 2020. Investors sold the pound after the Bank of England’s announcement.

UK economic growth is expected to fall by nearly 1 per cent in the final quarter of 2022. The BoE also forecasted that the economy would stay flat for most of 2023 and 2024, which some analysts believe is very optimistic given recent economic data. Around 40 per cent of households are already struggling to pay energy bills. With the onset of winter and another price cap increase by Ofgem expected in October, along with inflation at 10 per cent and wages falling behind, a recession is almost guaranteed.

Markets are betting that a rapidly slowing economy will force the BoE to reduce the pace of future monetary policy tightening, helping support the pound and lower government borrowing costs.

In 1972, the GBP to USD exchange rate was 2.61, in 1982 it was 1.82, 1992 = 1.92,  2002 = 1.58, 2012 = 1.62 and 2022 1.30. In the space of 50 years, the pound Sterling has halved in value against the USD.

The big problem for the UK is faltering producivity against its peers. England has the third highest proportion of low-skilled workers in the OECD. England also has 6 of the top ten most deprived regions in Europe. The top performing companinies in the UK have fallen behind competitors.

The FT published a highly detailed set of charts about Britain’s poor productivity and concluded – “Productivity growth has slowed in almost all advanced economies since the financial crisis. But Britain’s slowdown has been more dramatic than any leading western economy. Annual growth in productivity has plummeted from average annual rates of about 2.3 per cent before the collapse of Lehman Brothers to 0.4 per cent in the past decade.”

The reality is that Britain was the leading country in Europe for productivity in the 1960s, ahead of both Germany and France. Today, Britain is near the bottom of the G7 league table.

Why does all this matter? Achieving higher growth in productivity or output per hour worked (through innovation and technology) is the way countries become wealtheir. As they do, living standards increase and governments have the necessary resources to improve public services or cut taxes.