Weaker sterling will not rebalance a badly lopsided economy. But it will make the poor poorer
Even the darkest cloud has a silver lining and there is one definite upside to sterling’s crash. Those Brexiters eager to reintroduce the imperial system of measurement can rename our heavily devalued pound the ounce. Because, make no mistake, the pound doesn’t count for as much as it did in early summer. At the end of last week, financial information service Bloomberg ranked sterling among the 10 worst-performing currencies of the year. The Argentinian peso, the Yemeni rial, the Haitian gourde: all have had a better 2016. Measured against a basket of the currencies of Britain’s main trading partners, sterling is now weaker than after Black Wednesday, weaker than after the 1992 ERM crisis, weaker than after the collapse of RBS and HBOS. It is in fact about as weak as it has ever been. Whatever happens next, Liam Fox, Michael Gove and the rest have earned a place in the record books.
The right wing of the Conservative party has thus engineered an 18% devaluation of the pound against the US dollar. The first big drop came after the EU referendum; the second followed directly from the Tory conference in Birmingham last week. This is itself a historic reversal: the Conservatives are meant to be the party of sound money. As Philip Stephens observes in his history Politics and the Pound (which should be required reading for all A-level politics students), the Tories have often treated sterling’s strength as a measure of national virility. It’s Labour who are meant to be the louche Keynesians: the party of low interest rates and “the pound in your pocket”. But what the Gnomes of Zurich were to Harold Wilson, the fat-fingered traders and their algorithms are now to Theresa May.
By prioritising immigration controls ahead of access to the single market, and expecting 27 other countries unanimous in their irritation with the UK to cut us a special, favourable deal, Mrs May has made hard Brexit almost a certainty. That prospect – and its grave long-run implications for Britain’s economy – is what currency markets are now factoring into the value of the pound. On having this pointed out to them, some will claim this is whingeing by the “Remoaners” and point to the FTSE’s rise. Fair enough, but they might also remember that the dollar value of the FTSE 100 index of multinationals is plunging. The FTSE 250 index of smaller, largely domestically focused firms has not done half as well. Had the Bank of England not spent almost £400bn on UK government bonds, one might expect gilt prices to have tanked also. As it is, they are merely slipping. In economic terms, the fall of the pound will do more harm than good to Britons.
The UK is a country that consumes more than it manufactures, that imports more than it exports. Market movements won’t put that right. The British manufacturing base has been pulverised for four decades. In terms of manufacturing as a proportion of national output, the UK has fallen from 20th in the world in 1970 to 116th. Looked at strategically, Britain has hardly any world-class large manufacturers producing complex, high-value goods in this country. What it has instead is a plethora of small and micro-businesses, often assembling components made abroad. Over the next few weeks, petrol prices (which are denominated in dollars on world markets) are likely to shoot up – by about 5p a litre, reckon motorist groups. Over the next few months, high street goods’ prices will also rise. Inflation will be on the march. It is by no means certain that there will be strong growth, as businesses sit on their hands during the article 50 negotiations.
For those who rely on benefits, inflation will mean immiseration. As chancellor, George Osborne froze the level of many working-age benefits. That came into force this April, hitting 11 million families. As prices go up, they will be hit again and again. According to the Resolution Foundation, a couple with two children in which the husband works full-time and the wife works part-time – both on or just above minimum wage stand to lose a total of £720 a year by 2020. Some £610 of that loss will be down to Brexit. The “just managing” families targeted by Mrs May will become even worse off. This is what a car crash looks like – and article 50 hasn’t even been triggered yet.
There is just one more factor to consider: Mark Carney now has less than 90 days to decide whether he will helm the Bank of England after 2018. Given that the leavers attacked him, given that Mrs May implicitly criticised his decisions last week, he might opt to step down. Then we really would see what a sell-off looks like.