Is the U.K. at Risk of Plunging Into Recession Too?

Over the past week, I’ve written about the implications of slowing growth in the U.S. and euro zone economies. Unfortunately, the bad news don’t end there! Word about the possibility of the U.K. dipping into recession also started to gain steam when the most recent employment report was released.

Last Wednesday, it was reported that the unemployment rate in the U.K. rose to 7.9% in June. Even Chancellor of the Exchequer George Osborne admitted that he was disappointed with the rise. Analysts had predicted the rate of joblessness to remain steady at 7.7%.

There were also more people who signed up for unemployment benefits in July. The 37,100 rise in the Claimant Count Change report translated to the largest increase since May 2009. Yikes!

Unsurprisingly, this has gotten naysayers talking about the British economy sinking into the dreaded depths of recession. After all, last week was also a week of bad data from the U.K.

If you remember, manufacturing production contracted in June by 0.4%, upsetting the forecast which was for a 0.3% uptick. On top of that, we also saw that the trade deficit widened during the month to 8.9 billion GBP from 8.5 billion GBP in May.

It’s no wonder BOE monetary policy committee members voted unanimously to keep rates on hold at their current levels. BOE officials Spencer Dale and Martin Weale, who both used to argue for interest rate hikes in the past meetings, decided to head back to the doves’ side and admit that the U.K. economy isn’t strong enough.

In fact, looking deeper into the recent policy meeting minutes reveal that the central bank is even considering more stimulus for their shaky economy. It looks like all the King‘s men are worried about another great fall in economic growth, possibly an effect of the ongoing debt crisis and the impact of their government’s austerity measures.

As always, the ever-dovish Adam Posen pushed for another round of quantitative easing in order to keep the U.K. economy afloat. After all, they probably don’t have to worry much about future inflation anymore as the BOE cut their inflation forecast from 1.9% to 1.7% for the next couple of years.

But before you start dumping the pound like there’s no tomorrow, hold your horses! There are still a number of BOE officials who have yet to be convinced that the U.K. needs more quantitative easing. Until then, pound traders will most likely keep close tabs on upcoming U.K. data to figure out whether the BOE will finally pull the trigger on QE or not.

If you’re trading the pound, you should also consider for the meantime the impact of the recent U.K. slump on David Cameron’s coalition government. You see, they were hoping that an improvement in the jobs sector and consumer spending could offset the negative impact of government budget cuts. Apparently, that doesn’t seem to be the case.

Despite all that, the pound was still able to reach new highs yesterday, but that was mostly because of renewed optimism in the euro zone. Consequently, some believe that the pound will fall back to its recent lows sooner or later. What about you? Do you think the pound’s rally will last?

GBP/USD 1-hour chart