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Analysis

Falling pound makes UK poorer and less powerful

by Hugo Dixon | 31.07.2019

We will only get a real sterling crisis if we crash out of the EU – and that’s unlikely because MPs will probably stop the new prime minister dead in his tracks. But if we do, we’ll all be poorer.

The jitters on currency markets following Boris Johnson’s arrival in Downing Street are so far not terribly serious. The pound is down only 3% against the euro in the past week and is trading roughly where it has been in the three years since the referendum.

Sterling has plunged twice in the past four years. The first time was at the end of 2015 when investors started to realise that the referendum wasn’t going to be a walk in the park for David Cameron. The second time was after the referendum result itself. Taken together, the pound is 20-25% down versus the euro.

If we crash out, there will be another big fall. A no-deal Brexit will disrupt our trade not just with the EU but also with other markets. (Read our no deal dossier here).

Delinquent government?

As if that’s not bad enough, investors may conclude  we have a delinquent government. Johnson seems determined to spend money we don’t have to win popularity with voters and bail out the economy. He’ll also soon have to pick a new governor of the Bank of England to replace Mark Carney who leaves the post in January. He may choose a Brexiter who cares more about supporting government policy than fighting inflation. 

Because we import more than we export, we have a big current account deficit – 5.6% of GDP in the first quarter of 2016. We have to rely on foreigners to plug the gap by lending us money or investing in the UK. But the Brexiters are destroying the UK as an attractive investment proposition. 

In such a scenario, the pound would tank. While it’s hard to predict how big a fall could be in store, it would be surprising if sterling didn’t drop at least another 10%. That would take the entire drop since late 2015 to a third, in rough numbers.

Poorer and less powerful

Why should we care? Won’t the currency act as a safety valve allowing our companies to export their goods and services despite the disruption to trade that a crash-out Brexit would cause – and so protecting people’s jobs?

This is sort of true. But in the process we will become poorer and less powerful. 

Brits who travel abroad on holiday already see the impact. Everything just costs so much more.

Even those who stay at home will pay the price through higher inflation. Everything we import – from oil to food to clothes to mobile phones and high-tech kit for our defence industry – will cost more.

By contrast, everything in the UK will look cheaper to foreigners. Our workforce will be cheap. And our assets – such as property and companies – will be cheap too. 

Once the pound has fallen far enough, bargain hunters from abroad will come in to scoop them up. We’ll be so desperate for cash, we’ll struggle to say “no” even if it means selling the family silver to the Chinese or Russians.

Vote Leave and make the UK cheap as chips? That wasn’t exactly the slogan in 2016.

It would be far better to stay in the EU. We’d then have a strong pound, cheaper foreign holidays and less inflation. We’d also have more power on the global stage.

8 Responses to “Falling pound makes UK poorer and less powerful”

  • It has become patently clear that the dogma of the Brexiters is so deeply ingrained that many of them really don’t care what damage they inflict upon the country – or other European countries.

  • I’m probably being naive but, although we do not have a written constitution – there are requirements for governments and parliament to protect the UK: its citizens and assets around the world – this must include economic welfare?

    The lunacy, ignorance and total lack of intellectual rigour manifest by Johnson and his cabinet clowns – who show little understanding of what will occur – surely need to be confronted with a vigorous legal response to this situation. The various remainer groups are doing their best to gain further traction in defeating the current self centred approach.

    If there are any legal eagles out there who feel that there are recourses to apply containment to the ambitions of the blind leading the blind – it would be useful to gain some understanding of what might be of value.

  • The UK imports far more than it exports. E.g., if you are in the business of exporting manufactured goods, you will also be importing much of the raw materials to make them. If the cost of the imported goods goes up because of the exchange rate, you either have to pass on the additional cost to the customer, or shave your expenses – such as employees. This may result in a drop in production, resulting in possibly more contraction. If you are issuing dividends to investors, they may decide to move their investment elsewhere (like the EU), i.e. vicious circle. Therefore, the drop in the pound is a latent threat to anyone in the manufacturing sector. However, since many of those working on, say, assembly lines, live in Leave-voting areas, I doubt that this has dawned on them. Yet.

    The country is in for a very, very rude awakening. Thank God I live in Europe.

  • It must surely be up to parliament to stop this suicidal policy of the present government which is bringing this country into disrepute in so many ways. The video in the People’s Vote campaign daily newsletter today showing Boris Johnson stating, in 2016, that in no circumstances was it a question of the UK leaving the Single Market, should be shown on tV screens all over the country.

    How can one trust these politicians who say one thing one day and the opposite the next? No wonder the country is so fed up with its elected politicians, some of whom however are serious and sensible people.

  • Just as an aside; could the population in this country please get their head round the fact that they live in Europe? But not on the European Continent? Just so it gets clear that this spat between the UK and the EU is a good old tiff like at many times in the history of Europe. And given the serious damage the UK inflicts on the EU the Brits will take over the position of “the bastards” that was so gladly given to the German population post-WWII. But Europeans you are boys & girls; like it or not.

  • I assume that the amount that the UK owes the EU for future commitments (incorrectly referred to as the divorce bill) is designated in Euros.
    So €47bn @ say £1.20 to €1 give the figure of £39bn which is often discussed.
    If, as a result of Johnson’s policies and crashing out of the EU the pound falls to parity with the euro we have the calculation of €47bn being £47bn.
    So that would add a further £8bn to the bill.

    And that is before Johnson attempts to renege on the UK’s valid liabilities, which willl lead to us becoming an country that is not to be tusted, and the collapse of our credit rating, which in turn will, no doubt, lead to a further collapse in sterling.
    For example to say £0.90 to €1 – which would add another £5bn to give a total sterling cost of £52bn.
    Fun isn’t it?

  • Other people extremly dependant on the value of the pound are expat pensioners in Europe and elsewhere. Those in Europe also have the threat of having their pensions frozen in the case of a No Deal. The UK Government has been fond of putting the ball into the court of the EU and EU governments to protect the rights of UK expats. However, its no good UK expats being given rights to residence by EU governments, if the value of their UK-derived incomes is progressively reduced.
    It makes a complete mockery of Citizens Rights being a top priority for the UK Government.