The alarming drop in the value of sterling will hit living standards—and holidaymakersby Vicky Pryce / July 31, 2019 / Leave a comment
If there is one thing Brexiteers admit that “scaremongering” economists got right it is the exchange rate, which has been very weak since the referendum. I remember being on a platform at the LSE on 23rd June 2016 when the first results came in from Sunderland, which declared 60:40 in favour of Leave. This spelled the end of Remainer hopes. Behind us on the screen, which was showing the BBC programme, sterling promptly went into a nosedive and has since stayed down at some 10-15 per cent below the roughly $1.50 it was before the Brexit vote.
Shares were also plummeting, until the realisation sank in that in fact a weak pound was good news for FTSE 100 companies, whose bulk of earnings are from overseas.
The value of sterling, which never fully recovered, is undergoing another steep decline now. As the pound has fallen by a further 4 per cent or so over the past month on increased fears of the no deal espoused by Boris Johnson, the complacency of the markets has been shattered. From pricing in a disorderly Brexit at no more than 15 per cent probability, that has now changed to between 30 and 50 per cent, depending on who you talk to.
There is no doubt that the markets feel happier with a soft Brexit—and probably happiest if there is no Brexit at all. But they are bracing themselves for a lot of political instability, even factoring in a general election in the coming months. They will also worry should the new cabinet respond to a rapidly slowing economy with tons of extra borrowing and the abandonment of Phillip Hammond’s (already rather weak) fiscal rules. And while at the time of the referendum world trade and global growth were on a strong upward trend, this is no longer the case and the Office for Budget Responsibility is warning of a recession in the event of a crash out.
If the worst should happen and the UK plunges off the edge, there have been predictions of parity with the dollar and below parity against the euro. If those outcomes materialise the impact will be felt very severely, though there is general agreement among commentators that a no-deal scenario cannot be what prime minister Johnson is wishing for.
In any case pressure…