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Davy research note suggests sterling could fall below $1.35 in event of a vote to leave

about 8 hours ago
Updated: about 7 hours ago

Eoin Burke-Kennedy

Mayor of London Boris Johnson appearing on the BBC One current affairs programme, The Andrew Marr Show.




There are now clear signs that uncertainty around Brexit is affecting economic growth in the UK, according to a report by Davy Stockbrokers, which cites a marked slowdown in Britain’s services sector as evidence.

The UK services Purchasing Managers’ Index (PMI), the main barometer of activity in the sector, fell to 52.7 last month, its weakest reading since March 2013.

Companies also indicated that jobs growth slowed to a two-and-a-half year low as a result of fresh fears around Brexit, financial market volatility and weak economic growth at home and abroad.

The report by Davy noted that the weak numbers followed poor manufacturing and construction data, and pointed to a slowdown.

So far the depreciation of sterling has attracted the most atttention, however.

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Against the euro, sterling has depreciated to 79.2p and against the dollar to $1.39, its weakest level since 2009.

Davy said, however, that a substantial part of the depreciation had taken place in 2015, when UK macroeconomic data were weaker than expected, culminating in downward revisions to gross domestic product (GDP) growth.

Sterling is forecast to fall below $1.35 against the dollar in the event of a vote in favour of Brexit, pushing sterling to its lowest level against the dollar since the mid-1980s.

While most opinion polls point to a majority in favour of staying, Davy’s report suggests a key risk to the UK outlook “is that uncertainty leading up to the referendum persuades companies and households to postpone spending decisions”.

However, it said there was, as yet, little sign of household spending falling back with consumer spending rose rising 0.8 per cent in the final quarter of 2015, supported by rising nominal wages.

In the short term, uncertainty around Brexit had the potential to hurt GDP growth, it said, noting the current growth forecasts for 2.2 per cent for 2016 “now look too optimistic”.

In the event of a vote to leave, estimates suggest that tariffs and trade barriers could reduce UK GDP by 1-3 per cent over the next decade, it said.

Should foreign direct investment, competition or productivity be hurt, the estimated negative impact doubles or triples to 6-9 per cent of GDP.

Nonetheless, Davy’s report said an exit, under the current rules, would involve a two-year cooling-off period

“Our view is that the UK would maintain its membership of the single market. A fudge would be required on the free movement of people, allowing the UK some limited autonomy on migration, but essentially the status quo should be maintained.”