The UK economy is heading into a phase of slow growth and high inflation, referred to as stagflation, which is negative for the value of Sterling.

The British Pound dropped against both the Euro and the Dollar after the Office for National Statistics (ONS) reported that the UK economy grew by only 0.1% month-on-month in November. 

This was below the anticipated growth of 0.2%, which would have brought the annual growth rate down to 1.0%.

“The spectre of stagnation now looms large in the UK. Budget uncertainty coupled with disruptive weather will add to the disappointing growth data we've seen in recent months,” said Sanjay Raja, Senior Economist at Deutsche Bank.

The Pound to Euro exchange rate fell to 1.1864 following the news, reversing over half of the previous day's rally, which had been driven by weaker-than-expected inflation data from both the UK and, more significantly, the US, Pound Sterling Live reports.

Meanwhile, the Pound to Dollar exchange rate dropped by 0.20% to 1.2206, with downward momentum firmly in place.

“Storm Bert will have disrupted activity, bringing with it torrential rainfall, snow, and floods, impacting all sectors in the UK economy,” Raja added.

Deutsche Bank's quarterly nowcast models indicate a flat fourth quarter, even though some increase in activity is anticipated for December.

“With the ONS revising down its estimate of Q3-24 GDP growth to 0% q-o-q (from 0.1%), we now see the UK economy stalling entirely in the second half of the year,” Raja said.

This is disappointing news for Chancellor Rachel Reeves, who is relying on economic growth to strengthen her finances and support a substantial rise in spending over the next four years.

Markets are increasingly worried that, without growth, the UK's debt situation will become more challenging, leading to a selloff of UK debt and the Pound.

The UK economy was the fastest-growing in the G7 during the first half of the year, but models indicate it will largely stagnate in the second half. The ONS has confirmed that there was no growth between the three months ending in November 2024 and the three months ending in August 2024.