As the global elite (the “dirty” word du jour) descended on Washington on Friday, working the corridors of the International Monetary Fund and World Bank, there was one thing they couldn’t ignore. It wasn’t weak growth, it wasn’t negative rates. It wasn’t even Donald Trump.
It was Brexit and the pound’s dramatic flash crash. In a matter of minutes sterling plunged to a fresh three-decade low.
While the fall was exacerbated by algorithmic trading, it may also denote a much more sinister future for the UK economy. The pound’s weakness may be part of a fundamental shift in the state of the UK.
Brexit secretary David Davis believes that the pound’s decline has some downsides but also a very large number of upsides. Weakness in the currency means tourists will flock in, exports will surge, and it will inflate earnings for companies made overseas.
And data so far shows the British economy, despite initial wobbles, has performed much better than many – not least the IMF itself – had forecast. As former Bank of England MPC member Adam Posen told me, part of the resilience of the economy comes from the currency depreciation. But Posen also says “the short-term export boost is limited and will be bad for the medium and long term”.
And simply put, when investors look at a currency, they take a bet on whether it’s a strong or weak economy. Mark Gilbert of BloombergView says it straight: currencies are like the share prices for countries, and investors are betting against Britain.
The pound’s move on Friday was brutal, and banks have started revising their longer-term forecasts on sterling. ING, JP Morgan and Julius Baer have all reduced their year-end forecasts for the British currency.
And the help the weak pound is giving is to an economy that is still benefiting from trade ties that may now be in jeopardy. OECD chief economist Catherine Mann says Brexit represents a change in the competitive nature of the UK economy, with broken trade relationships that will need to be rebuilt.
Theresa May’s government really hasn’t offered any clarity on what its negotiating position is, or in which way it wants the UK to leave the EU. Will Britain really prioritise curbing immigration over keeping Single Market access?
For Philipp Hildebrand, former governor of the Swiss National Bank, “the last week showed we have two issues: preserving the same access to the EU market, and sovereignty on immigration. And the market is starting to realise they are irreconcilable. It seems pretty clear where the government has laid the ground, and therefore, markets are reacting.”
The drop in sterling also means that we’re importing inflation longer term. If the goods we consume become more expensive and wages don’t rise, then we’ll all feel poorer, even without travelling abroad.
One thing the chief executives, policy-makers and government officials from around the world in Washington DC were obsessed about was talent. Foreign talent. We risk hurting ourselves twice. A more insular immigration policy sends a signal to skilled international workers about this country. And should we lose access to the Single Market that will hurt the country’s finance industry, a direct employer of over 1m people, not to mention losing the pounds its workers spend here.
Between home secretary Amber Rudd and international trade secretary Liam Fox’s policy speeches (there may have been a U-turn, but who can tell?), EU workers are being used as pawns to be bargained with, and frankly most of them feel harassed. What then for this country’s business leaders? 40 per cent of FTSE 100 chief executives come from overseas. Then there’s sport: 13 out of 20 managers of premier league clubs are foreign. We may have voted to curb immigration, but did we really also vote to have poorer quality football? And don’t even ask about Euro 2020…
These views are not necessarily shared by Bloomberg.