Britain is moving closer to the nightmare Brexit scenario businesses have long feared.
Boris Johnson has used his first days as prime minister to double down on his threat to leave the European Union on October 31, even without an exit agreement in place to protect trade.
The UK government is now working on the assumption that there won’t be an agreement with EU officials, one of Johnson’s top deputies said over the weekend. A government marketing campaign is meant to prepare the public.
The rhetoric drove the British pound to its weakest level in more than two years on Monday. The currency dropped further on Tuesday, nearly breaking below $1.21.
Business continues to push back, arguing that a rupture with Britain’s biggest export market would be deeply damaging. A major lobby group warned that a disorderly Brexit would disrupt almost every part of the UK economy, and French carmaker PSA said new trade barriers could doom its factory near Liverpool.
Investors are increasingly concerned that Johnson “actually wants to go through with a hard Brexit, potentially even as his Plan A,” said Esther Reichelt, a foreign exchange strategist at Commerzbank.
Taking a hard line
Business groups have long cautioned that a messy Brexit would be a disaster, disrupting the supply chains that run across Europe and potentially injecting panic into financial markets.
UK government estimates show that GDP would shrink by at least 2% by the end of 2020, and the government would be forced to borrow an extra £30 billion ($37.4 billion) per year. UK stock markets would fall 5% and the pound could lose another 10% of its value.
That Johnson’s team appears to be preparing for it as a matter of course will only stoke those fears.
Michael Gove, the government minister Johnson has put in charge of planning for a “no-deal” Brexit, wrote in the Sunday Times that a messy exit is “now a very real prospect.”
Gove wrote that the UK government would press the European Union to renegotiate the deal it struck with Johnson’s predecessor, Theresa May. EU officials have repeatedly refused to do so.
“We still hope they will change their minds, but we must operate on the assumption that they will not,” said Gove. “The prime minister has been crystal clear that means we must prepare to leave the EU without a deal.”
UK foreign minister Dominic Raab added fuel to the fire on Monday, telling the BBC that the UK government is now “turbo-charging” preparations for a disorderly exit in light of the European Union’s “fairly stubborn” stance.
Their remarks came as the Confederation of British Industry, the UK’s biggest business lobby, said that neither the United Kingdom nor the European Union is ready for “no deal.”
“Although businesses have already spent billions on contingency planning for no deal, they remain hampered by unclear advice, timelines, cost and complexity,” the group said in a report.
PSA, the French automaker that manufactures Peugeot (PUGOY), Vauxhall and Opel cars, confirmed Monday that the future of its Ellesmere Port near Liverpool depends on what happens with Brexit.
The next generation of the Vauxhall Astra car is set to be made both there and in Germany. But CEO Carlos Tavares told the Financial Times that the company would move production from England to a plant in southern Europe if necessary.
New pound low
Sterling continues to sink in this environment. On Monday, it fell 1% to its lowest price against the dollar since March 2017 and weakened against every G10 currency.
“Concerns over the United Kingdom crashing out of the European Union with no Brexit deal in place is clearly haunting investor attraction towards [the pound],” said Lukman Otunuga, a research analyst at currency broker FXTM.
Analysts at Morgan Stanley said in a note this month that the pound could fall to between $1.00 and $1.10 if Britain leaves the European Union without a deal. It could trade between $1.10 and $1.20 if Johnson takes a tough negotiating stance with Europe, they added.
A sharp decline in the value of the pound could cause inflation to spike, hurting consumers. And while it might help exporters, a collapsing currency could scare off foreign investors and make life difficult for British companies that have to make payments in dollars.