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Sterling bounces back as economy recovers: Pound back above $1.17

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Sterling bounces back as economy recovers: Pound rallies 1% to maneuver back above $1.17 amid hopes Britain may dodge a recession

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 because the US currency eased following strong gains this 12 months.

On the rise: Sterling climbed by around 1% against the dollar after hitting a 37-year low of $1.14 last week

The rally in sterling got here as figures from the Office for National Statistics showed the economy grew by 0.2 per cent in July following a 0.6 per cent 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 may be avoided – or at the 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 following 18 months’.

Meanwhile, Germany faces recession as a dramatic rise in energy costs extinguishes the probabilities of recovery from pandemic lockdowns, in response to the country’s leading economic think tank. 

The Ifo institute said it now expects the German economy to contract by 0.3 per cent in 2023 having previously forecast 3.7 per cent growth. It also bumped up its forecast for 2023 inflation by 6 percentage points to 9.3 per cent.

‘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 primary quarter of 2023 will likely be particularly rough for consumers as energy suppliers adjust prices in response to high procurement costs, driving inflation to around 11 per cent, said the institute.

The German economy grew barely within 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 0.2 per cent fell in need of experts’ predictions of 0.3 per cent as activity within 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 for the reason that start of the 12 months, and there may be a risk that it’s already in recession’.

Defined as two consecutive quarters of contracting output, a recession can be recorded if the economy shrank again between July and September, following the 0.1 per cent decline between April and June. 

Experts said the disappointing figures for July underlined the necessity for a plan for growth – one in all the important thing proposals recommend by Truss. 

She began last week by capping annual energy bills at £2,500 for the standard household.

Alice Hain, personal finance analyst at investment platform Bestinvest, said: ‘With the two-year freeze in energy bills saving households £1,000 a 12 months, the UK is predicted to suffer a much milder recession than previously forecast.’

But Modupe Adegbembo, economist at AXA Investment Managers, said: ‘Whilst the [energy bill] package is about to cut back headline inflation, the boost to growth it would provide leaves the Bank of England with more to do to make sure inflation returns to focus on.’

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