The British pound surged against the dollar on Monday, gaining more than 1.6 per cent after Britain and the European Union extended discussions on a post-Brexit trade deal.
While the decision by British Prime Minister Boris Johnson and Ursula von der Leyen, the European Commission President to continue talks beyond Sunday saw sterling jump the most in two months to $1.3437 at 12.45pm London time on Monday, the extension was not welcomed by businesses which fear mass disruption if Britain exits the EU without a deal.
“The pound and FTSE 250 are enjoying a welcome boost in early trade, with traders reaching for UK-related markets amid tones of slight optimism that weekend talks provided a narrow opportunity for a trade deal,” said Joshua Mahony, senior market analyst at online trader IG.
“With less than three weeks left until the UK leaves the EU, brinksmanship is going to have to move aside in favour of compromise if a deal is going to pass before year-end. From a traders’ perspective, the prospect of a potential breakthrough does provide some floor for the pound for the time being.”
French Finance Minister Bruno Le Maire warned on Monday that in the event of no deal: "The losers will be the British. We don't lose much.”
According to French government estimates, Brexit would only snip 0.1 per cent off gross domestic product (GDP) in France next year and trade to Britain "was not much as far France's total global trade volume is concerned", Mr Le Maire told a French radio station.
S&P global ratings said on Monday that the economic and political consequences of not reaching a deal "are large enough for both sides to strive to find common ground”.
“A no-deal scenario would have important implications for the UK economy, the country's ability to attract inflows of capital and labour over time and its public and external finances,” S&P said.
A significantly weaker-than-expected economic recovery would place downward pressure on its sovereign ratings on the UK.
“This could happen, for instance, if merchandise and services exports from the UK lose access to key European markets for a prolonged period,” the ratings agency said.
A ratings downturn could also emerge if foreign financing for the UK’s large external deficit diminishes and sterling's status as a reserve currency comes under pressure.
The UK is expected to borrow a total of £394 billion ($528.2bn) this year, equivalent to 19 per cent of GDP, which is the highest recorded level of borrowing in the country's peacetime history.
“Any reduction in the appetite of non-residents to finance this deficit, or to roll over the UK private sector's elevated stock of short-term external debt, would also weigh on the UK’s growth prospects,” S&P said.
While the EU's Brexit negotiator Michel Barnier said a new trade pact with Britain was still possible, the ongoing delays are “frustrating” and costing businesses, said Tony Danker, director general of the Chamber for British Industry.
He urged the government to make use of the time to avoid “the looming cliff edge” of January 1 by taking three steps to ensure companies were not confused by the chaos. The first must involve more detailed guidance on border checks, while the second must involve grace periods to allow businesses time to adjust.
“And third, prepare support for firms who will face the greatest challenges in the short run. Those in sectors and supply chains that are badly hit will face extinction through tariffs, red tape and extra costs. We need to ensure those firms survive to play a role in post-Brexit Britain,” he said.
Supply issues have become a common feature in recent weeks as some retailers stockpile goods ahead of the end of the transition period.
Last week, Honda was forced to halt production at its Swindon factory in England after problems at ports delayed the arrival of required car parts.
While the Japanese carmaker resumed production on Monday, many other businesses have also been affected, with Swedish furniture store Ikea apologising to customers after facing stock shortages due to port congestion.
Felixstowe, Britain's largest port, reported congestion in November due to a surge in demand caused by Brexit, Covid-19 and Christmas, however, the problem has now filtered to other UK ports as well, including Southampton and London Gateway.
"The confluence of Covid, seasonal trade and Brexit is placing understandable pressure on the UK port network,” said a spokesman for DP World, which owns Southampton port and London Gateway.
“Our teams at London Gateway and Southampton are working tirelessly to manage the additional traffic through our ports while maintaining our high customer service standards."
The “uncertainty” is making it harder for companies to prepare for January 1, according to the British Retail Consortium (BRC), with a no-deal set to increase prices thanks to new checks and red tape.
“Without a deal, the British public will face over £3bn in food tariffs and retailers would have no choice but to pass on some of these additional costs to their customers who would see higher prices filter though during 2021,” said Helen Dickinson, chief executive of the BRC.
The consortium also urge shoppers not to stockpile supplies or buy more food than they need. “Retailers are doing everything they can to prepare for all eventualities on January 1 – increasing the stock of tins, toilet rolls and other longer-life products so there will be sufficient supply of essential products. They have also been building new customs and VAT processes, working with suppliers to ease logistics, and more,” said Ms Dickinson.
During the first lockdown earlier this year, supermarkets were forced to place limits on essential items such as toilet roll after Britons resorted to panic buying.
“While no amount of preparation by retailers can entirely prevent disruption, there is no need for the public to buy more food than usual as the main impact will be on imported fresh produce, such as fresh fruit and vegetables, which cannot be stored for long periods by either retailers or consumers," said Ms Dickinson.