A new report states the pound’s post-Brexit fall is the 'worst devaluation in its history'. But is it?
Samuel Tombs, chief UK economist at Pantheon Macroeconomics.
The facts speak for themselves. Nearly 18 months have passed since markets became anxious about Brexit and sterling began to depreciate. In volume terms, exports of goods and services were 1 per cent lower in Q1 2017 than in Q4 2015. Imports, however, were nearly 5 per cent higher. Net trade, therefore, has dragged on GDP growth. Depreciations often take time to bear fruit. Still, net trade had already boosted GDP growth at the same stage after similar depreciations in 1967, 1976, 1992 and 2008, providing some compensation for the hit to consumers’ real incomes. So this has been the worst depreciation on record. Exports haven’t picked up because exporters have raised sterling prices by 17 per cent since November 2015. As a result, the competitiveness of UK goods has barely improved. Higher margins earned by existing exporters will eventually attract other firms, but this rebalancing process will be slow, given uncertainty over the UK’s trade links. Indeed, manufacturers’ investment intentions in plant and machinery are at their lowest level in six years, according to the CBI.
NO – Michael Howell, managing director at CrossBorder Capital.
What matters in economics is not the cheapness of the currency, but the strength and confidence of industry. Were this false, Argentina and Zimbabwe would now be among the richest nations on Earth and Germany and Switzerland among the poorest. But the other side of a devalued coin is the opportunity it gives to boost competitiveness. Here, understanding long-term capital flows matters. No serious analysis can extrapolate short-term trade performance after this unexpected drop in the pound into some long-term condemnation of our future. In fact, since the Brexit vote Britain’s underlying foreign reserves have actually risen by over $5bn - some 4 per cent. Far from foreign investors panicking and taking money out of Britain, they are investing it back in. This inflow of international capital shows long-term confidence in Brexit Britain, something echoed in domestic boardrooms and on the shop floor through surveys of buoyant business confidence. More foreign cash gives our industry the opportunity to invest. Judge our future competitiveness by our productivity.