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Money A weaker British pound makes no economic sense

19:50  13 september  2018
19:50  13 september  2018 Source:   msn.com

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For the vast majority of Britons, the overwhelming effect of the past two depreciations has been in raising prices faster than wages: British five and ten pound banknotes and one pound sterling coins sit in this arranged photograph in London, U.K., on Tuesday, Sept. 19, 2017. Strategists are revising their estimates for the currency after its best week since 2009 saw it gain almost 3 percent as the Bank of England signaled it would look to withdraw stimulus “over the coming months.” Photographer: Chris Ratcliffe/Bloomberg © Bloomberg British five and ten pound banknotes and one pound sterling coins sit in this arranged photograph in London, U.K., on Tuesday, Sept. 19, 2017. Strategists are revising their estimates for the currency after its best week since 2009 saw it gain almost 3 percent as the Bank of England signaled it would look to withdraw stimulus “over the coming months.” Photographer: Chris Ratcliffe/Bloomberg

For the past 70 years, Britain has been the master of currency depreciations. In 1948, £1 bought just over $4 and 13.4 of the new Deutsche Marks. Today a pound buys only $1.30 and the equivalent of DM2.20. The UK’s performance in devaluing its currency has been world class. This has not been matched by its economic record. 

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Over that 70-year period, only Canada had a weaker growth of gross domestic product per head among the G7 economies. More recently, since the advent of the euro in 1999 for example, UK living standards have improved just slightly slower than the average member of the single currency.

The long-term lesson is that, although depreciation relieved some balance of payments crises in 1949, 1967 and 1992, cheaper sterling is no route to prosperity.

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The two most recent depreciations should only add to scepticism. The 25 per cent sterling depreciation from late 2007 to early 2009 failed to save Britain from a slump and did little to improve the nation’s trade balance. Goods exports volumes barely responded to improved competitiveness, services exports did nothing at all and the main effect of a cheaper pound on trade was to curb the foreign travel of UK citizens. 

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The 20 per cent reduction in the value of the pound since late 2015 has been even more disappointing. Exporters have not sought to undercut their foreign rivals with the additional competitiveness and instead have raised the sterling price of exports. There has been little substitution of domestic sales for imports despite the rising cost of foreign goods and services.

A mini revival in manufacturing employment is overwhelmingly in making simple, low-productivity products such as food or metal goods such as radiators, cutlery and screws. With net trade contributing nothing to growth since the Brexit referendum, and the Bank of England repeatedly revising down its expectations of the boost to come, the latest sterling depreciation is challenging to be the worst in British history.

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For the vast majority of Britons, the overwhelming effect of the past two depreciations has been in raising prices faster than wages, reducing their living standards. They still buy almost as many imports, but are just poorer. Britain’s price level has increased 30 per cent between 2007 and 2018, compared with 17 per cent in the eurozone and a 19 per cent average in all advanced economies.

With limited labour power to force employers to take account of higher costs of imported inflation, only Mexico and Greece have suffered weaker growth of real average wages over the past decade among countries in the OECD, the Paris-based club of mostly rich nations. Sterling weakness is to blame and no one should be surprised that the British are unhappy.

A view of the information screens at the London Stock Exchange in the City of London which show the FTSE 100 index.   (Photo by Yui Mok/PA Images via Getty Images) © Getty A view of the information screens at the London Stock Exchange in the City of London which show the FTSE 100 index. (Photo by Yui Mok/PA Images via Getty Images)

Economic thinking is catching up with the poor record of depreciation in modern economies. Work by Professor Gita Gopinath of Harvard University demonstrates that companies overwhelmingly invoice their exports and imports in a dominant currency. For the UK, that means the US dollar and the euro, especially in global supply chains where goods and services imports are a large proportion of the value of any export. It means that sterling has much less effect on competitiveness and trade volumes than in the past.

With mounting theoretical and practical evidence that depreciation has not helped Britain in the long term and has severely harmed living standards in the past decade, seeking to devalue sterling further should be on no sensible economic blueprint. Yet, a weaker currency sits at the heart of the proposals from the recent Institute for Public Policy Research’s commission on economic justice, which were endorsed by the Labour party.

This is terribly backward. If you want to help hard-pressed families and have a forward-looking programme for Britain, all the recent evidence suggests that depreciation is yesterday’s policy.

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