After it had its best week since 2009, will a stronger pound hit UK economic growth?

Is a strengthening pound bad news for growth? (Source: Getty)

Sam Alderson, an economist at the CEBR, says Yes.

While the recent appreciation of sterling is unlikely to derail the UK’s largely domestic and consumption-driven recovery, it will act as a slight brake. But the real negative for the economy is the impact that the continued strength of the pound is having on the composition of growth.

The stronger pound only acts to compound the economy’s reliance on consumer spending, place further pressure on the nation’s ailing manufacturing exports, and widen a persistent current account deficit that is already a cause for concern. With little in the way of inflationary pressure and real wage growth at its highest level in years, the foundations for household consumption look well established.

As such, there are limited benefits to be had from further increases in the value of sterling. While currency devaluation isn’t the best solution to the issues the UK economy faces, appreciation only makes addressing them more difficult.

Mark Gregory, chief economist at EY, says No.

A strengthening pound may at first look like bad news for growth, but recent historical analysis shows that the impact is fairly limited. Up to 20 per cent of firms have issued profit warnings citing currency factors as the principal reason, but this is old news – business has had time to adapt and weather the storm. Moreover, the pound is strengthening relatively more against the euro than other currencies.

So although exports to the Eurozone may have been held back, the impact on other markets has been more muted. And as the EY Item Club says in its latest forecast, the exchange rate is expected to drop back over the medium term, which should encourage UK producers to shift their focus from domestic to overseas markets.

Other factors, such as improving productivity through investment in skills and infrastructure, along with UK businesses targeting the correct markets, will continue to have a bigger impact on economic growth than fluctuations in the exchange rate.

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