Pound sterling drops as experts warn UK economy set to stagnate due to Brexit

UK economy grew in third quarter - but faltered in September, and economists warned of grim outlook

The pound dipped after rallying in recent weeks as talk of a Brexit deal turned more positive (Getty Images)

The pound dropped against the dollar and the euro on Friday after the US indicated that a pre-Christmas interest rate hike is on the cards, and official UK data showed the economy flatlined in September.

Sterling dropped more than 0.3 per cent against the greenback to $1.3021, and fell 0.21 per cent against the euro to €1.1471.

Analysts put the dip partly down to the US federal reserve’s indication that it will hike rates in December, which strengthened the dollar.

However, UK economic data also had an impact, with the Office for National Statistics reporting that the economy stagnated in September.

While growth for the third quarter on the whole was lifted by 0.6 per cent - the fastest rate since 2016 - economists said this was likely to be a one-off.

With “persistent Brexit uncertainty and the financial squeeze on consumers and businesses likely to weigh increasingly on economic activity in the coming quarters”, according to Suren Thiru of the British Chambers of Commerce.

Meanwhile, Schroders senior European economist Azad Zangana said the economy is not forecast to pick up in the near term.

“We expect UK fourth quarter growth to be very weak as Brexit paralysis truly takes hold,” he said.

“Assuming the government can successfully negotiate the withdrawal agreement with Brussels and ratify it in Parliament, then we could see a rebound in growth early next year. “However, a failure to complete a deal which would mean a no-deal or cliff-edge Brexit, is likely to cause a further slowdown in activity, which could be enough to tip the UK into recession.”