This article is more than 11 years old

This article is more than 11 years old

The pound has hit a new all-time low against the euro following further warnings that the UK economy is in worse shape than expected.

Sterling fell to €1.1391 this morning and also hit a record low against a basket of other currencies.

The pound's latest weakness came as economists warned Britain's economy was deteriorating faster than expected and could suffer badly in 2009.

The National Institute of Economic and Social Research warned today that the UK's gross domestic product shrank by 1% in the three months to November, more than the official estimates.

Howard Archer, the chief European and UK economist at IHS Global Insight, said he expected to see a further "substantial contraction" in the first half of 2009 and that there was unlikely to be any growth until 2010. He is predicting a 2% drop in GDP next year.

The weakness of the pound is a blow to the troubled UK retail sector because it increases the price of imported goods, as well as pushing up the cost of travelling abroad. It should help exporters compete, but the manufacturing sector has been hit by a fall in demand worldwide.

With the Bank of England expected to keep cutting interest rates, sterling is expected to keep falling. One trader predicted the pound would soon be worth just €1.07.