Brexit naysayers have a new target: the British pound. The pound has fallen to one of its lowest levels in modern history – and that is supposed to be a bad thing. But it’s not. A weaker pound is just what this country needs. The more competitive sterling is, the more it will revitalise industry, increase investment, improve productivity and raise living standards.
As the Brexit negotiations have looked increasingly shaky during the summer, the value of the pound has slipped. In April this year, it had climbed back to $1.43 after its post-EU referendum fall to $1.20. By mid-August 2018, it was down again, just below $1.30.
The general response to a weaker pound is dismay, augmented by regret that holidays abroad will be more expensive and that imported goods will cost more. All true, but this does not stop a more competitive pound being much better for the economy than most people seem to think. There are very good reasons for believing that sterling has been much too strong for a long time and that this has had a major impact on unbalancing our economy.
The main problem is that too strong a pound has depressed investment by making it unprofitable to manufacture a wide range of goods in the UK. This is why we have deindustrialised. Even as late as 1970 almost a third of our national income came from manufacturing. Now it is less than 10%. There is very little investment in new manufacturing plants in the UK because overall costs are much lower in other countries, including some, such as Singapore, with much higher living standards and industrial wages than those in the UK.
The result has been that we have lost the highly skilled manufacturing jobs which used to maintain the prosperity of the regions outside London and the South East of England. Furthermore, even though the UK does very well in the sale of services to the rest of the world, we still sell more goods abroad than we do invisible exports such as financial services and tourism. The result is that we do not have enough overall to sell on world markets to pay our way, so we finish with a huge balance of payments deficit every year – averaging around £100bn a year, or 5% of our GDP.
Our foreign payments deficit siphons purchasing power out of the economy, which must be replaced by borrowing and government payments deficits to stop the economy tanking. The resulting static productivity leaves most of the population with no higher living standards than they had ten years ago, while the rich get richer and inequality gets worse. Not a great scenario for prosperity and stability in the future – and a very high price to pay for cheap holidays overseas and under-priced imports.
So, a lower pound might not be such a bad thing and an even weaker one much better. And this is what we may get. Both a “no deal” outcome to the Brexit negotiations and the possible election of a Labour government would very probably precipitate a further steep fall in sterling. This would be greeted by the vast majority of the pundits as a disaster – just as, for example, they all said about us leaving the pre-cursor to the euro, the Exchange Rate Mechanism, in 1992. But they were completely wrong then – and they may well be again. After the 1992 devaluation, the economy grew steadily every year for 15 years.
What would actually happen if we had a much lower pound is that it would suddenly be worth investing in industry again in the UK, which is the key to getting the imbalances in the UK economy put right. Manufacturing would return to the regions. Productivity and wages would start to rise. Our trade and foreign payments balance would improve. Government borrowing would go down as the economy became better balanced, and the relentless drift to more and more inequality would be stemmed.
So why don’t most people welcome a weaker pound? The answer is that our political environment is saturated by people who have no interest or experience in manufacturing, who don’t understand its dynamics and cost structure and who believe that the salvation of the economy lies with the service sector most of which is not very price sensitive. The problem is that this scenario has no long-term viability. Services are too difficult to sell abroad in the required quantities and getting productivity up outside manufacturing is generally impossibly difficult.
So next time you read the value of the pound is slipping down, don’t regard this as a disaster. It isn’t. It may well be the start of a trend which is bound to materialise sooner or later. The world is not going to put up forever with the UK enjoying a standard of living 5% higher than we are earning.