Mounting fears that the UK will leave the EU without a deal on 31 October drove down the value of the pound against the US dollar and the euro during July. UK Government bond yields also continued to slide as investors digested the news that, having won the contest to become Conservative Party leader – and thus Prime Minister – Boris Johnson was accelerating preparations for a no-deal Brexit.
- The BoE believes the UK’s banking system can cope with no deal
- UK growth picked up in May after contracting in April
- The IMF warned that no deal posed a real threat to growth
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Mounting fears that the UK will leave the EU without a deal on 31 October drove down the value of the pound against the US dollar and the euro during July. UK Government bond yields also continued to slide as investors digested the news that, having won the contest to become Conservative Party leader – and thus Prime Minister – Boris Johnson was accelerating preparations for a no-deal Brexit. Over July, the yield on the benchmark UK government bond fell from 0.79% to 0.60%, and the yield on the short-dated gilt dropped from 0.60% to 0.45%.
“The prospect of no deal is now “very real”" (Michael Gove)
In an article in the Sunday Times, Michael Gove stated that the prospect of no deal is now “very real”, warning: “The Prime Minister has been crystal clear that … we must prepare to leave the EU without a deal”. Although the Government still hopes the EU will be prepared to reopen discussions, Mr Gove said they must “operate on the assumption that they will not”. Referring to Theresa May’s Withdrawal Agreement, he said: “You can’t just reheat the dish that’s been sent back”, but the EU has reiterated that there is no possibility of further negotiation.
In its Financial Stability Report, the Bank of England (BoE) acknowledged that the likelihood of a no-deal Brexit had increased since the beginning of the year but believes that the UK’s banking system remains resilient to the impact of a “worst-case disorderly Brexit”. Nevertheless, it stressed the difference between financial stability and market stability, warning of “significant volatility and asset-price changes” in the event of no deal. Elsewhere, credit ratings agency Moody’s warned that a no-deal Brexit would prove “significantly negative” for UK sovereign and related issuers.
Having contracted at a month-on-month rate of 0.4% in April, UK economic growth picked up May, growing by 0.3%. Activity was boosted by a muted rebound in car production, which declined in April following pre-Brexit shutdowns in March. The International Monetary Fund (IMF) expects the UK economy to grow by 1.3% this year and 1.4% next year; however, this prediction depends on an orderly departure from the EU, and the IMF cited a no-deal Brexit as a principal risk to global economic growth, alongside further trade conflict, warning that they would “sap confidence, weaken investment, dislocate global supply chains, and severely slow global growth”.
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