Sterling slump: Boris Johnson playing with Brexit fire

Boris Johnson has been the UK’s leader for just over a week, but he and his ‘Brexit war cabinet’ have achieved one milestone already: The pound has slumped to its lowest level against the US dollar and the euro since 2017.

The cause is Britain’s newfound eagerness to up the ante in its negotiations with the EU, with Mr Johnson, at one stage, refusing to even meet with EU leaders, until they scrap the terms of his predecessor Theresa May’s Brexit deal.

His do-or-die hardball strategy has been gleefully parroted by his ministers (such as the foreign secretary, Dominic Raab), who say that leaving without a deal would be an even better way to squeeze a trade deal out of “stubborn” Brussels and prove the naysayers wrong.

In more normal times, the sight of a currency sell-off greeting a new Conservative government — a government led by someone who promised to be the “most pro-business prime minister” in history — might lead to a rethink.

But we know Mr Johnson doesn’t worry much about big market moves: “The pound goes up, the pound goes down,” he once said.

We also know that some Brexiters see weak sterling as a good thing.

The former UK Brexit secretary, David Davis, said in February that forecasts of a 20% currency fall, in the event of no-deal, were something to cheer: “Our goods will become 20% more competitive on the global market.”

Robert Halfon, a Conservative MP, said this week that, “hopefully, holidaymakers will choose GB as a holiday destination”.

There’s a dangerous and deceptive optimism at work here.

Beyond the usual dismissal in the UK of any criticism of Brexit as Project Fear, there’s clearly a belief that threatening no-deal is kind of a free hit: It can depreciate the pound, boost British exports, and heap pressure on Brussels in one swoop. This is playing with fire.

While it’s true that the trade-weighted sterling fall of 15% since the referendum means a theoretical knock-on effect on goods export prices, that might matter less than the Brexiters think.

Mr Johnson and Mr Raab need to reflect more carefully on the chief reason investors are dumping the pound: The anticipated negative impact of breaking from the EU, which is something that worsens the harder the prospective rupture looks.

And this impact almost certainly means a less attractive and more costly environment for exporters, whether that’s via new tariffs, regulatory barriers, or lower productivity growth.

So, rather than merely inciting companies to invest more in the UK and export to the world, the currency drop also signals the risks of doing so.

That’s why UK business investment is lagging the G7, according to Bloomberg Intelligence, while data from EY shows more foreign investment projects are being delayed.

Instead of dismissing businesses’ fears of a no-deal Brexit as “unbalanced”, Mr Raab should listen to CEOs, such as Carlos Tavares of Peugeot.

In a Financial Times interview, Mr Tavares said he might have to pull production from the carmaker’s Cheshire plant and shift it to the continent, if the post-Brexit economics don’t work.

The site exports most of its output to Europe and imports most of its parts; what Mr Tavares wants isn’t a weaker pound, but the visibility on customs charges that a no-deal scenario doesn’t give him.

Try telling a carmaker it should cheer a depressed sterling, when EU car import tariffs are 10% and a single component can cross the English Channel three times.

As Mr Tavares can attest, imports are an equally important part of the trade picture. Yet, the more Panglossian Brexiters are ignoring the fact that a weakening currency makes them pricier.

And this isn’t just about protecting parts-importing manufacturers.

Britain sources half of what it eats from abroad, so it’s a little unwise, politically, to dismiss the threat.

The UK’s risk of runaway inflation is pretty low right now, judging by Bank of England data and market forecasts, but we’ve seen bouts of consumer price rises since the referendum.

The country’s real household disposable income has shrunk an estimated 0.3%, on average, between 2016 and 2019, according to the Resolution Foundation.

Brexit is already making the UK worse-off.

The falling pound won’t help.

- Bloomberg