With Boris Johnson set to succeed Theresa May as the British prime minister on Wednesday, there is a question investors are beginning to pose when the risk of a chaotic Brexit rises.
Johnson has said that Britain must leave the EU by October 31 with or without an agreement to protect trade with the country's largest export market. A "no deal" Brexit would trigger a recession and lead to the pound noset, according to official forecasts. Some experts say that pounds and dollars can even reach parity.
"It is something that can happen over time," said Lukman Otunuga, research analyst at currency exchange FXTM. "It's going to be a long and painful mess until October 31[ads1]."
Analysts warn that a downturn in the value of the pound would cause inflation to increase and harm consumers. And although it can help exporters, a falling currency can scare foreign investors and make life difficult for UK companies that have to pay in dollars.
Outstanding parity
Right now, the pound is under $ 1.25. It was almost $ 1.50 before the 2016 Brexit poll.
Experts predict that Johnson's election as leader of the Conservative Party and the nearing October deadline will continue to push sterling against $ 1.20, and possibly lower.
"The risk for the UK leaving without an appointment goes up during the day," said John Wraith, chief of UK's investment strategy at UBS. "This is the … magnetization sterling lower, just because time is shortened."
Britain's budget responsibility office says it would lead to a recession . GDP would shrink by 2% by the end of 2020, and the UK government would be forced to borrow an additional £ 30 billion ($ 37.4 billion) per year, according to the watch budget.
The devaluation of the pound would add to the mess. Imports will be more expensive and cause prices to rise. Wraith said that if the parity between the pound and the dollar happens, inflation would probably have doubled and come between 4% and 5%.
Some experts argue that a weaker pound will help the economy get back on track. A falling pound increases tourism to the UK and helps to make exports cheaper, the argument goes. British companies could also sell more at home as the price of imports increases.
But tourism accounts for less than 10% of GDP, while exports contribute about 30% to GDP.
"Friendliness of strangers"
Another problem is that many UK companies still have to pay dollars and the costs will increase sharply. British billionaire Richard Branson told BBC earlier this month that parity with the dollar would be "devastating" for Virgin companies, such as the Virgin Atlantic airline.
"All of our costs are in dollars," Branson said. He went on to say that Virgin would invest less in the UK as a result.
Should the falling pound undermine confidence in the UK economy among foreign investors, it may raise concerns about the UK's current account deficit, or the amount it borrows from the rest of the world.
This deficit, which is significant by international standards, reached £ 30 billion ($ 37.4 billion) in the first quarter of 2019, or 5.6% of GDP.
Bank of England's governor Mark Carney has warned that if confidence in foreign investors or "foreigners' friendliness" diminishes in the wake of Brexit, then Britain could struggle to finance domestic expenses.
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