In 2024, the British pound (GBP) has been struggling due to growing fears of stagflation in the United Kingdom. Stagflation, a combination of stagnant economic growth, high inflation, and rising unemployment, has become a pressing concern as the UK grapples with persistent inflationary pressures while economic activity falters. These dynamics have put significant downward pressure on the pound, as investors become increasingly pessimistic about the outlook for the British economy.
1. Persistent Inflationary Pressures in the UK
Despite efforts by the Bank of England (BoE) to curb inflation through a series of interest rate hikes, inflation in the UK remains stubbornly high. As of 2024, inflation has hovered above 6%, far exceeding the BoE’s 2% target. This has been driven by several factors, including elevated energy prices, supply chain disruptions, and food price increases. The UK has been particularly vulnerable to energy price volatility due to its reliance on imported energy and its exposure to global supply shocks, especially in the aftermath of the Ukraine conflict.
The BoE’s aggressive rate hike campaign, which began in 2022, has helped slow inflation’s rise, but price pressures remain elevated. As a result, the central bank faces a difficult balancing act between controlling inflation and avoiding a deeper economic downturn. The high cost of living has squeezed household budgets, leading to reduced consumer spending, which has further weighed on economic growth.
2. Sluggish Economic Growth
While inflation remains a significant problem, economic growth in the UK has stagnated, raising concerns about a prolonged period of weak economic activity. In 2024, the UK economy has teetered on the brink of recession, with GDP growth barely positive. The slowdown has been driven by weak consumer spending, declining business investment, and falling exports. A combination of Brexit-related trade disruptions, ongoing supply chain issues, and weaker global demand for British goods and services has hurt the UK’s export sector, further slowing economic activity.
The services sector, which is a major driver of the UK economy, has also struggled as consumer confidence has plummeted. Retail sales have fallen, and businesses are facing rising input costs, making it difficult to maintain profitability. With little growth momentum, the UK economy is at risk of entering a period of stagflation, which would severely undermine the country’s recovery prospects.
3. Bank of England’s Dilemma
The Bank of England finds itself in a challenging position as it grapples with rising inflation and slowing growth. Throughout 2023 and into 2024, the BoE raised interest rates to combat inflation, pushing its key rate to over 5%. However, higher borrowing costs have exacerbated the slowdown in the housing market, discouraged business investment, and added pressure to indebted households.
Governor Andrew Bailey has acknowledged the difficult trade-offs the central bank faces. While inflation is still well above target, further rate hikes could deepen the economic slowdown and push the UK into a recession. Conversely, if the BoE pauses or cuts rates too soon, inflation could remain elevated, eroding purchasing power and weakening the economy further.
The market has reacted to these concerns by pricing in limited room for further rate increases, which has weighed heavily on the pound. Investors are worried that the BoE may be forced to prioritize growth over inflation control, leading to a looser monetary policy than initially anticipated. This perception has driven the GBP/USD exchange rate lower, with the pound trading at around 1.1950, a significant drop from its 2023 highs.
4. High Cost of Living and Impact on Consumers
The high cost of living in the UK has been a major driver of the stagflation narrative. With inflation outpacing wage growth, real incomes have been eroded, leaving households with less disposable income to spend on goods and services. This has led to a sharp decline in consumer confidence, as many Britons struggle to keep up with rising prices for essentials like food, energy, and housing.
The housing market, a key pillar of the UK economy, has also cooled dramatically. Rising interest rates have increased mortgage costs, discouraging home buyers and reducing demand for property. This has caused house prices to stagnate or fall in some areas, further denting consumer wealth and spending power.
As household consumption accounts for a large portion of the UK’s GDP, the downturn in consumer spending has been a major drag on economic growth. The combination of weak demand, high inflation, and rising interest rates has created a vicious cycle that is difficult to break without significant policy interventions.
5. Impact on the British Pound
The growing concerns about stagflation have had a pronounced effect on the value of the British pound. The GBP has been under pressure throughout 2024, with the GBP/USD exchange rate falling below the 1.20 level. This decline reflects investor fears that the UK economy is heading for a prolonged period of slow growth and high inflation, which could limit the Bank of England’s ability to raise interest rates further.
In addition to the domestic factors weighing on the pound, global risk-off sentiment has also contributed to its weakness. As global investors flock to safe-haven currencies like the U.S. dollar amid rising geopolitical tensions and economic uncertainty, risk-sensitive currencies like the pound have suffered. The combination of internal economic challenges and external pressures has created a difficult environment for the pound, with further downside risks if the UK’s economic situation does not improve.
6. Outlook for the Pound and UK Economy
The outlook for the pound remains uncertain, as much will depend on the BoE’s policy response and the broader trajectory of the UK economy. If the BoE is able to successfully navigate the current economic challenges and bring inflation under control without triggering a deep recession, the pound could stabilize and recover. However, if inflation remains elevated and growth continues to stagnate, the pound may face further depreciation.
