London (CNN Business) – The pound slumped to its weakest level in more than two years Tuesday. That’s bad news for Britain.
Prime Minister Boris Johnson has used his first days in office to double down on his threat to leave the European Union on October 31 “no matter what.”
Now, fears that Britain will leave the European Union without an agreement in place to protect trade have driven the pound to lows against the US dollar not seen since March 2017.
The currency nearly broke below $1.21 on Tuesday before recovering slightly. At the Moneycorp exchange at London’s Gatwick Airport, £1 is buying just $1.
The pound has weakened dramatically since Brits voted to leave the European Union in 2016.
After trading near $1.49 ahead of the referendum, it had dropped to $1.20 by January 2017 on fears that former Prime Minister Theresa May would take Britain out of the EU’s huge unified market and customs union.
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Analysts think the pound could be poised to test that level again as Johnson continues to press EU officials to renegotiate the Brexit deal agreed by May but rejected by the UK parliament.
“[Johnson] is committed to a hard-line stance towards the EU that will, of course, be rebuffed aggressively,” Societe Generale strategist Kit Juckes wrote in a note.
The pound could reach parity with the dollar following a disorderly Brexit, according to analysts, who predict the currency will grind steadily lower between now and the end of October.
A poorer country
Some Brexit supporters argue that a weaker pound could help the UK economy get back on track if Britain crashes out of the European Union.
A falling pound boosts tourism to the United Kingdom and helps make exports appear cheaper to overseas buyers, the argument goes. The benefits will eventually equal or outweigh the costs.
But there is compelling evidence that a sharp decline in the value of the pound will in fact make the United Kingdom worse off.
“Depreciations don’t work. They have an economic effect, but they are not a good economic strategy,” Bank of England Governor Mark Carney told the UK Parliament in 2018. “It is how you make yourself poorer.”
A weaker pound causes inflation to spike because imports are more expensive. That hurts consumers who could see prices rise more quickly than wages. Plus, Britain imports more than it exports.
A collapsing currency could also frighten away foreign investors and make life difficult for UK companies that have to make payments in dollars.
The dynamic has already been at work since the referendum was held in June 2016.
The pound has shed 18% against the dollar since the vote, helping to push inflation toward 3% in 2017.
But a British export boom didn’t materialize. One reason why is that exporters were contending with more expensive imported raw materials and fuel.
Even UK tourism companies have expressed concern.
In 2017, Virgin Atlantic, the airline owned by Richard Branson’s Virgin Group, encouraged Americans to estimate their savings on a trip to London with an online “Brexit calculator.”
“Fish and chips: was $7, now only $5. Bargain!” the narrator said in an advertisement.
But tourism makes up less than 10% of GDP. And Branson recently warned that Virgin Atlantic will take a major hit should the pound continue to fall. “All our costs are in dollars,” he told the BBC.
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