Closing summary
Time to recap
UK assets have had a miserable August, hit by worries that Britain is falling into recession as inflation surges towards post-war highs.
The pound is on track for its worst month against the US dollar since October 2016, when Britain’s vote to leave the European Union was still hitting the currency.
Sterling has lost 4.5% versus the greenback in August, and has sunk to just $1.16, the lowest since March 2020.
Government bonds have also been hit this month, as investors sought a higher return for holding UK gilts.
Fears of a long recession and the likelihood of higher public spending to cope with the cost of living crisis has sent the interest rate on Britain’s debts soaring towards its biggest monthly rise in almost 40 years.
10-year bonds, the benchmark, are headed for their sharpest monthly fall since 1986, with five-year and 20-year bonds also seeing the largest rise in yields in decades.
Here’s the full story:
Former chancellor Rishi Sunak has warned that the markets could lose faith in the UK.
Sunak, one of the two candidates to succeed Boris Johnson as PM, told the Financial Times it would be “complacent and irresponsible” to ignore the risk of markets losing confidence in the British economy, saying:
“We have more inflation-linked debt by a margin than any other G7 economy – basically more than double.”
Rishi Sunak with a very strong hint here that markets could lose faith in the UK economy if Liz Truss becomes Tory leader and makes unfunded spending commitments https://t.co/RgV3fSOX98 pic.twitter.com/oPJbxhi8uD
— Matthew Garrahan (@MattGarrahan) August 30, 2022
The cost of living crisis deepened this month, with shop price inflation hitting the highest levels since 2008.
The rapidly rising price of food including milk, margarine and crisps pushed prices up in the shops, in a bleak situation for consumers.
The government’s £400 payment to help families with their energy bills will not reduce inflation, after the Office for National Statistics decided it would treat the money as income.
Rising inflation has also hit UK business confidence, and is expected to end the UK’s house price boom.
John Lewis is to offer free food to all its workers, including temporary staff, during its peak Christmas trading period as a way to help with the cost of living.
The eurozone’s inflation crisis has deepened too, with prices rising at a record 9.1% in the last year.
Energy prices and food drove up the cost of living, with gas shortages and drought disruption hitting Europe’s economy. It raises the chances of another large interest rate rise from the European Central Bank, which meets next week.
Russia has tightened the pressure on Europe’s energy market, by starting a three-day shutdown of its Nord Stream 1 gas pipeline to Germany.
But UK wholesale gas prices have eased back from their recent highs.
The oil prices has dropped too, with Brent crude currently down 2.7% at $96.60 per barrel, on concerns that demand will slide if major economies fall into recession.
Jobs growth in the US was muted this month, according to the latest payroll report from ADP.
And European stock markets are ending August in the red, with the FTSE 100 down 0.8% at a one-month low.
Wall Street is a little stronger, though, with the Nasdaq index of tech stocks now up 1%.
The UK rail union has announced a nationwide 24-hour strike next month, which will coincide with the Labour party’s autumn conference.
And even the Panini sticker album has been hit by inflation – collecting the 2022 World Cup edition will cost you around £870.
Pound to plumb new depths, predicts analysts
Analysts at Capital Economics have warned that the pound will continue to slide in the months ahead, and could hit an all-time low in 2023.
In a new research note, they say:
Our forecast that the energy crisis will push the euro-zone and UK economies into recession while the US gets away with a milder slowdown suggests that the euro and the pound will weaken further against the US dollar.
Capital Economics forecasts the pound will fall from around $1.17 this week to around $1.05 by the middle of next year.
That would leave it below the levels reached before the 1985 Plaza Accord ($1.09), after the UK left the ERM in 1992 ($1.43), during the 2008/09 Global Financial Crisis ($1.38), after the 2016 Brexit vote ($1.21) and during the 2020 COVID-19 crisis ($1.21).
In fact, $1.05 would be an all-time record low.
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