Both UK and eurozone would suffer if there is no deal, says WMF

Investors spooked by rumours of revolt by Tory backbenchers and warning from IMF about UK crashing out of EU with no deal.

The pound has come under pressure on international currency markets after investors were spooked by weekend rumours of a backbench revolt that could topple Theresa May’s government and add to the uncertainty surrounding Brexit talks.

Sterling shed a cent against the US dollar, to below $1.31, and a similar amount against the euro to €1.122 on Monday as concerns about the stability of the government preyed on investors’ confidence in the outlook for the UK.

The prospect of a no-confidence vote was viewed by traders as likely to weaken the prime minister’s hand in Brexit negotiations and lead to the UK crashing out of the European Union without a trade deal.

Neil Wilson, analyst at ETX Capital, said: “Reports indicating May is facing a 40-strong rebellion from her own backbenchers has traders cautious on the pound’s outlook. But 40 MPs is short of the 48 required to force a vote on her leadership and with Labour looking strong, going to the country again is the last thing most Conservative MPs want.”

The pound recovered some lost ground later in the day, but remained weak after the International Monetary Fund warned that both sides in the Brexit negotiations would suffer if the UK left the EU without a deal.

An IMF official, Jörg Decressin, told Reuters that hard border controls and reversion to World Trade Organisation tariffs would cause damage on both sides of the channel.

“Under such circumstances our concern is that economic growth will suffer, especially in the UK, but also the euro area.

“We are then possibly looking at appreciably lower growth than we presently project.”

With the EU withdrawal bill likely to be tabled in the Commons on Tuesday amid the concerns of a backbench rebellion and clashes between the major parties expected over a series of amendments, the IMF’s warning comes at a delicate time for No 10.

Decressin, speaking after the IMF released its latest health check on the European economy, said the recovery across the continent looks increasingly assured, with Europe’s 28 members expected to grow by an average of 2.4% this year before slowing to 2.1% in 2018.

Most of Europe’s major economies will lag the average with the UK showing growth, up by 1.7% this year and 1.5% next year, the report said.

France’s GDP is forecast at 1.6% this year, rising to 1.8% next year as Emmanuel Macron’s labour market reforms begin to take effect. Germany’s growth rate will moderate from 2% to 1.8% in 2018.

“This recovery looks increasingly durable,” said Decressin, deputy director of the IMF’s European department.

“Growth in the euro area has been positive for 18 quarters, lately around 2.5%. Many countries in eastern Europe have seen growth around or above 3% for some time already. So this recovery has not only become broader but also stronger.”

The main uncertainty remains Brexit and what kind of trade relationship the UK can set up with the 27 remaining countries after it leaves the EU, he added.