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A weaker pound signals a weaker economy

by Sam Ashworth-Hayes | 04.08.2016
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From Juvenal’s contemptuous swipe at a population that cared only for “bread and circuses” to the queues sounding the death-knell of the Soviet Union, the humble loaf has held a prized place in the imagery of politics. Modern politicians can get easy publicity by denouncing price gouging. Consumers willing to express anything other than outright horror at the prospect of costlier groceries are rare indeed. But Vote Leave has found 17 million of them.

The cost of a basket of popular items tracked by price comparison website MySupermarket has risen for two months in a row, at least partly because of the post-referendum fall in the pound. If the UK does enter recession next year, as the National Institute of Economic and Social Research says is possible, or at least suffers a sharp economic slowdown, falling incomes could see the weekly shop take up an even larger chunk of families’ budgets.

This is not the picture the leave camp painted. Brexiteers told voters the EU was “putting up the price of food in supermarkets”, while Andrea Leadsom argued that “lower sterling is good for exports”, makes “inward investment more attractive”, and “means we may import less and buy more at home”, adding that these are all “good things for our economy”.

The problem is that sterling does not exist in a vacuum. The value of the pound has fallen because Britain outside the EU is expected to be a poorer place. Whatever “model” of post-Brexit nirvana our leaders choose, it will come with increased barriers to doing business with our single largest trading partner.

So yes, investment in Britain will be cheaper. It will be cheaper because the assets investors are buying will be worth less. The value of foreign investment in the UK will fall. And while exporters could theoretically benefit from a cheap pound, the pound has fallen because the economy is expected to take a hit.

While the change in exchange rates might cushion the economy’s fall, the bump will still be felt. As Neville Hall, a Credit Suisse economist, points out, UK exports are “not very price sensitive”, and the price of imported components for our exports will rise. The last large fall in sterling “didn’t have a huge impact” on export volumes.

It is correct to say we will probably import less – eventually. If exports are unlikely to rise, the value of the pound falls, and lending to the UK falls with it, that gap will be closed by a reduction in imports. This would leave British consumers – and manufacturers relying on global supply chains – worse off. These are not “good things”.

There is also also no guarantee that our current account deficit will close any time soon. As Chris Giles of the Financial Times points out, if sterling falls, exports do not rise and imports stay steady, the current account deficit will actually widen. This could well happen in the short run.

So the higher price of imported food could see some favourites falling off the menu, while overseas sales of Melton Mowbray pies may not skyrocket after all. It is not what people voted for. But it does give latter day plutocrats a ready retort to disgruntled consumers:  “Let them eat quinoa”.

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Edited by Michael Prest

Tags: currency, exchange rates, GBP, , Categories: Economy, Post-Brexit