The pound has dropped in value. What does this mean and is it a good or bad thing, in the short medium and long term?
There are both benefits and burdens to Brexit, but what is undeniable is that it is a shock and it causes a reassessment of our currency as compared to other currencies. This has caused a devaluation of the pound as compared to the dollar, the euro and other currencies. This has consequences. Some are not good. For example, imported goods like overseas fuel or non British food stuffs get more expensive. This is the origin of the Marmitegate crisis last week - and we will see some foodstuffs get more expensive in the shops if those shops are importing the produce.
If you are trying to export your manufactured goods you love the depreciation in the pound. Suddenly your goods are that much cheaper and more competitive.
Similarly look at tourism: if you run a home grown bed and breakfast or a hotel then the devaluation of the pound as compared to the dollar or the euro is wonderful news. Your product - the great British holiday - is now a lot more attractive to overseas visitors.
But if you are going on a European or American mini break then your pound buys less dollars or euros. Your holiday abroad got more expensive. Which means many families, I predict, will choose to staycation in the uk next year. Which boosts our uk tourism, hotel, pub and b + b
But don't take my word for it. The guardian is no friend of Brexit, but yesterday it did this assessment of why the pounds devaluation is not to be feared: it is a view. But whilst the jury is out in the future that Brexit holds the reports from business of the consequential devaluation of the pound is that fundamentally it is a good thing.
A weaker pound works by making exports cheaper and imports dearer. The effect, as after all the other devaluations and depreciations of the past 100 years – 1931 to 1976, 1992 and 2007 – will make the economy less dependent on consumers and more reliant on producers. Lord Mervyn King, a former governor of the Bank of England, thinks the latest fall in sterling is a good thing and he is right.
Put the Brexit vote to one side for a second and ask yourself the following questions:
- is the economy currently unbalanced?
- Is growth too dependent on consumer spending and asset price bubbles?
- Is the productive base of the economy too small?
- Is it a problem that the UK is running a balance of payments deficit worth 6% of GDP, bigger than ever before in peacetime?
If your answer to these four questions is yes – as it should be – then you need to accept that there is an upside to the falling pound. Indeed, many of those who are now talking about a sterling crisis were last year bemoaning the fact that Greece – trapped as it was inside the eurozone – did not have the benefit of a floating currency and so had to use a brutal internal devaluation involving wage cuts, pension reductions and welfare retrenchment to restore its competitiveness.
The current account deficit will shrink as a result of stronger exports from the manufacturing and service sectors, the boost provided to the tourism industry, and because cheaper domestic goods and services will be substituted for more expensive imports. To say that dearer imports will make life more difficult for consumers is to miss the point. That’s how rebalancing works.