Pound sinks as S&P issues ‘dismal’ Brexit alert

By Eamon Quinn

Sterling sank against the dollar and euro as S&P Global Ratings stepped up its warning to the British government that it risks pushing the country into recession under a no deal Brexit.

The ratings firm said if the UK were to crash out of the EU without a deal in March, its economy would contract 1.2% in 2019 and by 1.5% in 2020; unemployment would surge to a financial-crisis high of 7%; house prices would drop by 10% over two years; while inflation would surge to 4.7%.

Also, matching financial-crisis lows, London office prices “could fall by 20% over two to three years”, it said.

“Our base-case scenario is that the UK and the EU will agree and ratify a Brexit deal, leading to a transition phase lasting through 2020, followed by a free trade agreement,” S&P said, in its report, called Countdown to Brexit: No deal moving into sight.

“But we believe the risk of a no-deal has increased sufficiently to become a relevant rating consideration,” because of the issue of the border, it said.

Also, contingency plans by British firms “are unlikely to insulate companies fully from market volatility, legal and regulatory uncertainty, border delays, rising input costs and tariffs, and weakening competitiveness and operating performance in many sectors”, it added.

Sterling, which was little changed following the UK budget this week, fell yesterday by 0.45% against the euro to 89.29 pence and plummeted at one stage by 0.7% to $1.2704.

“The warning from the S&P echoes previous warnings from businesses leaders and leading economists,” said Fiona Cincotta, senior market at broker City Index.

The picture painted by the rating agency was dismal, with a recession forecast, unemployment rising to levels last seen in the financial crisis, house prices falling by 10% and inflation jumping to 4.7%.

"These figures come just one day after the chancellor’s optimistic budget. The pound is trading over 11% lower from its peak in April and its lowest level since mid-August.”

Joshua Mahony, market analyst at online broker IG, said: “Losses for the pound have grown more prominent of late, with fears over a possible no-deal Brexit, heightened by the realisation that the UK may not find it easy to replicate the current EU relationships with nations around the world.

“The Irish backstop issue has been a roadblock from day one and, with two years having passed, the fact that we remain some way from any resolution speaks volumes of difficulty in finding a solution which satisfies all parties. With the S&P citing a no-deal Brexit as a potential cause for the UK economy to tip into a recession, it is clear that markets are growing increasingly fearful of the impact such an event could bring,” he said.

Meanwhile, Capital Economics in London predicted that the fall in US stock markets will likely continue.

It said that “the slump” in US stock markets can be blamed, “at least in part, to concerns about the prospects for economic growth”.

It said:

We think that these worries are justified and forecast that the S&P 500 will end next year even lower than it is now, at 2,500,” noting the S&P 500 has fallen almost 10% this month.

“This drop is hard to reconcile with the latest US economic data, which have generally been upbeat,” it said, adding one alternative explanation is US equities had become overvalued.