Weak pound may not translate into a stronger economy

CAPITAL COMMENT

FOR THOSE who have been crying out for the pound to become weaker, here’s some good news. In the past few months, sterling has declined substantially against the currencies of its biggest trading partners, the EU and US.

Since last summer, the pound has fallen by over 10 per cent against the euro. Against the dollar, sterling is not far off recording the same depreciation. This makes all the goods that Britain exports to those countries a great deal cheaper for them to buy. This is great news for Britain’s exporters, giving them some vital breathing space at a time when the global economy is still nowhere near full speed.

There’s also a huge benefit for all those firms that earn the bulk of their revenue in dollars, euros or other currencies. They incur a large amount of their costs in sterling, but their earnings are made overseas. This goes some way to explaining the strength that we’ve seen in the FTSE 100 so far this year, when compared to its European counterparts. Every time the pound drops, those globally-focused companies receive a little boost to the bottom line.

All sounds pretty good doesn’t it? Unfortunately, for every plus there’s a minus. While some may benefit, a weaker pound can cause pain for others. The problem with a currency that depreciates significantly, especially against the dollar, is that you import one of the greatest problems facing our economy today – inflation.

As the pound plummets, everything we import into this country becomes more expensive. This is particularly true of commodities, which are all priced in US dollars. Resources like oil don’t actually become any cheaper if the price of crude falls. The price of Brent crude, for example, has fallen by almost 8 per cent in only three weeks, but there has certainly been no corresponding decline in the price of petrol at the pump. This is one of the clearest examples of how underlying commodity and currency fluctuations affect ordinary people and businesses, as the cost of fuel continues to remain at all time highs.

Higher inflation is a problem for the UK economy, which has now suffered above target price rises for years. Inflation is crushing disposable income, as real wage growth is increasingly rare. Savers are also being hit, with the cash they hold in the bank for future years actually falling in real value. The Bank of England, which is tasked with keeping inflation in check, has made it clear that it is in no rush to try and bring it down. In fact, some Bank officials have been vocal in admitting that they would tolerate higher inflation if it meant a return to more sustained growth.

As the pound falls, there’ll be winners and losers as the direct impact on financial markets is felt by us all.

Angus Campbell is head of market analysis at Capital Spreads. You can follow him on Twitter @AngusCapSpreads

While Capital Spreads attempts to ensure that the information herein is accurate at the date the information was produced, however, Capital Spreads does not guarantee the accuracy, timeliness, completeness, performance or fitness for a particular purpose of any of the information provided herein and under no circumstances are they to be considered an offer, solicitation to invest or be construed as giving investment advice.