Pound slides closer to euro as economic confidence slumps

The pound was down 0.7 cents to €1.052, while the euro was trading up 0.68p at 95.08p. At one stage the pound fell as low as €1.047.

It has now lost a quarter of its value against the single currency in the last 12 months while its 23% slump against a basket of world currencies is the worst since 1931, when the UK was forced to abandon the gold standard.

The latest slide came after Japan's decision to cut interest rates to almost zero pressured the Bank of England to follow suit. UK rates have fallen from 5.5% to 2% this year and could hit zero in 2009 as policy makers on Threadneedle Street fight recession.

A survey today showed confidence in the economy for the next 12 months hit a record low this month. Market researcher GfK NOP said its measure for the "general economic situation over the next 12 months" fell from minus 36 in November to minus 41.

But overall consumer confidence rose from minus 35 to minus 33 as shoppers looked forward to Christmas despite the expected problems next year.

Rachel Joy of GfK NOP said: "Consumer confidence improved this month after the interest rate cut and the drop in petrol prices, but still continues to hover at near-record lows. UK consumers have become even less confident about the future economic situation but, among these historically low levels of confidence, there is perhaps a glimmer of hope: there has been an improvement in the number of consumers who think now is a good time to make a major purchase, suggesting that high street deals and the small reduction in VAT have improved consumers views on this area. The crucial question for the economy is whether the improvement in this index will be translated into activity on the high street during the January sales."

The pace of decline in the UK economy over the last month has shocked many in the City. Capital Economics today downgraded forecasts made a month ago. It now expects the economy to shrink 2.5% next year, compared with an earlier prediction of 1.5%.

"Recent news on the UK economy has been even worse than we had anticipated," said economist John Higgins.

Ross Walker of Royal Bank of Scotland forecast decline of 2% next year - "the most severe contraction since the brutal recession of 1980-81".