As Brexit momentum sends sterling tumbling, is a weaker pound really such a bad thing for the UK economy?

The pound plunged after Leave moved ahead in the polls (Source: Getty)

Vicky Pryce, board member of the Centre for Economics and Business Research, a former government adviser, and co-author of It’s the Economy, Stupid. Economics for Voters, says Yes.

The external Monetary Policy Committee member Kristin Forbes recently pointed out that the burgeoning UK current account deficit has been more driven by a deterioration in the investment income account than by the trade account. The implication is that a devaluation will have less of an impact on goods exports than we think. In fact, on CEBR calculations, it may have to be in excess of 10 per cent and stay low for longer to have an appreciable impact. We also import many of our final goods, given our consumer dominated economy, and manufacturers rely heavily on imports for their supply chain. A sharp sterling drop would put considerable immediate upward pressure on prices people have to pay, with the possible need of an interest rate rise that would additionally stymie growth. A gentle devaluation reflecting underlying realities would be welcome – a sharp uncontrolled one is potentially hugely destabilising.

Simon French, chief economist at Panmure Gordon, says No.

Taken in isolation, a weaker pound will have a stimulative impact on the economy. Exporters can expect increased orders from overseas while domestic consumers will be incentivised to buy British. This boost to domestic demand has the potential to create a much needed multiplier effect within the economy. Indeed, a weaker sterling has already shown tentative signs of reversing the slowdown in UK manufacturing. These domestic impacts, taken together with the increased value of UK investments overseas, will also help address the dangerously high current account deficit. There are parallels with sterling’s exit from the European Exchange Rate Mechanism, where a 17 per cent depreciation set the conditions for the last UK current account surplus. While the broader economic argument still favours remaining in the EU, economics is rarely a black and white social science. That currency weakness has a positive side effect should not be sacrificed at the altar of Brexit frenzy.

City A.M.'s opinion pages are a place for thought-provoking views and debate. These views are not necessarily shared by City A.M.

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