Why a weaker pound won’t help the UK so much?

There is no question a cheaper Pound will help some companies but it depreciation is most unlikely to offset other economic problems the UK is going to encounter. Unlike the 1990s:

–   the Pound is not starting from a  chronically overvalued position

  • world trade is stagnating and there is no productivity miracle occurring, as there was then with information technology
  • China and several major emerging markets have lapsed into a growth hiatus of unknown duration, when in the earlier period they were starting to make their presence felt
  • global growth is weak and fragile, whereas it was accelerating quickly 20 years ago
  • the UK’s balance of payments deficit is a large 7 per cent of GDP, about 3 times as big as it was before the ERM debacle, and lack of confidence in the Pound could make financing the deficit more troublesome

You should note that the Pound has been falling since it reached $1.71 in July 2014, and yet the UK’s trade and external payments  position has gotten steadily worse. In the first quarter of 2016, the UK’s trade deficit was the biggest recorded since 2008. So don’t let anybody tell you that a cheaper currency, plain and simple, is a good thing for the economy. It depends.

That is from a good post by George Magnus.


Comments for this post are closed