Britain's bleak outlook sets sterling to downward spiral

By Joice Alves

LONDON (Reuters) - Sterling edged lower on Tuesday against the euro and was set for its biggest monthly fall against the single currency in 16 months as the energy crisis renewed recession fears in Britain.

Inflation in Britain could exceed 20% early next year if spiralling gas prices fail to come down, economists from U.S. investment bank Goldman Sachs warned, adding that a recession was on the way.

British household energy bills will rise 80% from October to an average of 3,549 pounds a year, the regulator said in Friday.

Sterling slipped 0.2% to 85.55 pence at 1008 GMT, to levels unseen in almost six weeks. Against a weakening dollar, the pound rose 0.2% to $1.1731, after falling on Monday to its lowest level against the greenback since March, 2020.

Esther Reichelt, FX Analyst at Commerzbank, noted that sterling - down about 13% against the dollar this year - was failing to gain support from expectations for rate rises at all the further Bank of England meeting this year as the energy crisis added pressure to the economy.

"The continued rise in gas prices entails the risk that the recession will be more pronounced and longer than previously expected. Strikes are already regularly paralysing parts of public life due to the significant decline in real wages and the resulting loss of purchasing power," she said.

Other headwinds weighing on sterling included the shortage of labour because of Brexit, the leadership contest in the governing Conservative Party and the resulting uncertainties around the next prime minister's fiscal policy on economic challenges, Reichelt added.

Britain's pub and brewing industry called on the government to outline an urgent support package to prevent eye-watering increases in energy costs causing irreversible damage to the sector.

Britain's services businesses reported a record increase in costs over the past three months and are downbeat about the future, as inflationary headwinds look set to squeeze demand further, the Confederation of British Industry said.

BoE data showed British credit card borrowing grew by 13% in the 12 months to July, the fastest rise since October 2005, against a backdrop of the biggest overall rise in consumer borrowing since March 2019.

Higher inflation, tighter monetary policy and the prospect of greater government borrowing set British government bonds on track for their biggest monthly fall since 1994.

(Reporting by Joice Alves; Editing by Robert Birsel)