Pound flashes red again as think-tank warns UK economy may ALREADY be in recession and says chance of a no-deal Brexit has doubled
- The pound fell by nearly half a per cent on Monday, striking lows of $1.245
- NIESR estimates a one in four chance that the UK economy is already experiencing a technical recession
- NIESR said the odds of a no-deal Brexit have risen from 15% to 30%
The pound tumbled by nearly half a per cent today as a leading think-tank cast serious doubt on the health of the UK economy and said the odds of a no-deal Brexit were higher than ever.
The currency dropped 0.4 per cent against the dollar to $1.245, and the same against the euro, in the final hours of the Conservative leadership contest as Eurosceptic Boris Johnson edged ever closer to becoming the next Prime Minister.
Voting closes today at 5pm and the markets are now widely expecting the former foreign secretary to be handed the keys to no 10 on Wednesday.
The pound fell against both the dollar and the euro today as Johnson edged ever closer to becoming the next Prime Minister and NIESR issued a stark warning
Today’s slide in the pound was not helped by a gloomy report from the National Institute of Economic and Social Research, which revealed a one-in-four chance that the UK economy is already experiencing a technical recession – before the country has officially left the bloc.
NIESR said that, if a no-deal Brexit is avoided, the economy is forecast to grow at around 1 per cent in 2019 and 2020 ‘as uncertainty continues to hold back investment and productivity growth remains weak’.
Without a deal, it predicts the economy will stagnate for a year and not grow again until 2021.
It said: ‘The outlook beyond October, when the United Kingdom is due to leave the European Union, is very murky indeed with the possibility of a severe downturn in the event of a disorderly no-deal Brexit.’
Jagjit Chadha, its director, said that such an outcome would fail to generate much economic joy ‘however we look at it’.
The think tank also rattled the currency by claiming that the chances of a a no-deal Brexit have doubled in the last three months from around 15 per cent to 30 per cent, as Johnson and Hunt both hardened their stances to curry favour with Tory voters.
The pound fell by nearly half a percent against the dollar in early trading
Johnson’s hard line on Brexit and promise to deliver the UK’s exit from the EU by October 31st, with or without a deal, has taken the wind out of sterling’s sails since the battle to be the next PM kicked off earlier this year.
The pound is not far off the 27-month nadir it struck last week, and analysts are divided on whether or not the pound has further to fall still in the coming months.
Boris Johnson (above) is now widely expected to become Prime Minister later this week
Analysts at ING Financial Markets argue that there’s scope for further decline, but others expect the currency to stabilise given that much of the no-deal Brexit risk has already been priced in, and parliament will soon enter summer recess – preventing them from pressing ahead with Brexit negotiations.
‘Sterling already trades at crisis levels and typically struggles to go much lower. We do not expect the market to assign a higher hard Brexit premium than before until parliament returns after the summer break in September,’ said Jordan Rochester, forex strategist at Nomura.
Analysts at Citi said in a note that a no-deal Brexit would likely trigger the Bank of England to cut interest rates, helping to ‘offset the negative economic effects of ‘crash out’ and support the currency.’
NIESR said the pound could slide by as much as 10 per cent on a no-deal Brexit.
The predictions come just days after the fiscal watchdog, the Office for Budget Responsibility, said the UK may slipping into ‘a full-blown recession’.
It also follows weak industry surveys that show manufacturing, construction and services sectors all suffering.