May’s ‘hard Brexit’ stance heightens concerns for U.K. economy

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Prime Minister Theresa May's decision to push for a "hard Brexit" has sent sterling tumbling and raised concerns among some businesses that Britain will face more uncertainty.

The pound fell sharply on Monday morning, down as much as 1 per cent to $1.2844 against the U.S. dollar, the lowest level in seven weeks. It is also down 12 per cent against the euro since the June referendum on leaving the European Union.

Sterling recovered somewhat after figures came out showing manufacturing output in September reached the highest level since June, 2014. Economists have said the falling value of the pound has been a boost to British manufacturers and other exporters.

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But Ms. May's comments have caused more uncertainty for the economy going forward as it now seems clear that Britain will not have as much free access to the EU market after the country leaves. Roughly 40 per cent of British exports go to the EU.

On Sunday, Ms. May told the Conservative Party conference that Britain will begin the process of leaving the European Union before the end of March. And she indicated that the country will push for a total break, rejecting a Norwegian or Swiss arrangement that involves some form of EU membership.

Ms. May did not support Brexit during the referendum and she had come under pressure to go for a "soft Brexit," which would involve keeping unfettered access to the EU market and accepting some free movement of people. EU officials have said repeatedly that Britain would have to accept the free movement of EU citizens in order to maintain the same access to the EU market.

But Ms. May's comments indicated that she supports "hard Brexit" backers, including many senior cabinet ministers, who want the country to maintain control over immigration and break with the EU entirely. That means negotiating a trade agreement similar to what Canada has done.

For businesses "whose prospects are sensitive to the freedoms of single market membership, the Prime Minister's broad message is the clearest signal yet that Brexit could force potentially significant changes to current arrangements with EU countries," said Sam Hill, senior U.K. economist at Royal Bank of Canada in London.

Mr. Hill added that "even if current economic data suggests economic performance is showing resilience to the referendum result, May's stance is a reminder that uncertainties related to [Brexit] turbulence could be costly for the economy in the short run."

The Prime Minister "has removed one big question – on timing – but has accelerated an urgent need for answers on others," said Carolyn Fairbairn, director-general of the Confederation of British Industry. "Businesses cannot continue to operate in the dark in other areas."

FXTM's chief market strategist, Hussein Sayed, told Business Insider that the pound is likely to remain volatile. "Now with the timeline being set, the negotiation of the terms will be a key driver for sterling going forward, but I expect it to be rough ride in the next few months," he said.

While the economy has held up since the referendum, the Bank of England has warned about the long-term impact of Brexit and taken steps to ease the possible fallout. It cut its key rate once in August and could cut it again in November, and it eased some capital restrictions on banks to encourage lending.

On Monday, Philip Hammond, the Chancellor of the Exchequer, also raised concerns about a potential long-term slowdown due to Brexit and said the government will abandon its deficit-cutting target and move toward less austerity.

"Anecdotally, we hear of businesses postponing investment decisions," Mr. Hammond told the BBC. "If we don't intervene to counteract that effect in time, that will have an effect on jobs."