Word on the web: The flight of the sterling

Does a stronger pound mean a stronger UK economy?

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Last week, the pound hit its highest level against the euro since November 2007, reaching 1.434. This week, financial commentators have been hotly debating what effects a stronger pound will have on UK economic growth. 

Two sides of the same pound coin Sam Alderson, Economist at the Centre for Economics and Business Research (CEBR), outlines his view in a City A.M. debate. He claims that there are limited benefits to be had from further increases in the value of the sterling. 

Alderson explains: “The stronger pound only acts to compound the economy’s reliance on consumer spending.” Additionally, he says that further pressure on the nation’s ailing manufacturing exports will “widen a persistent current account deficit that is already a cause for concern”.
18%
The percentage that sterling has appreciated over the past two years

Looking at the long-term concerns of the stronger pound, Alderson says: “While currency devaluation isn’t the best solution to the issues the UK economy faces, appreciation only makes addressing them more difficult.” 

Ernst & Young’s Chief Economist, Mark Gregory, contributes an alternative but not so different view. His stance: “Improving productivity through investment in skills and infrastructure, along with UK businesses targeting the correct markets, will continue to have a bigger impact on economic growth than fluctuations in the exchange rate.”

Gregory believes that businesses have had time to adapt to weathering the financial storm, and argues that “a strengthening pound may at first look like bad news for growth, but recent historical analysis shows that the impact is fairly limited”. 

His view that the consequences of the fluctuating exchange rate will be minimal is clear: “The exchange rate is expected to drop back over the medium term, which should encourage UK producers to shift their focus from domestic to overseas markets.”  

City A.M. debate

Good news for holidaymakers and investors While growth prospects might not set the economy on fire, the strengthened pound is great news for anyone heading to Europe, according to David Trumper, who writes for World First Blog. Trumper explains that holiday money will go much further than it did in 2014 when “£1,000 spending money would have got you €1,265”.

And the benefits won’t just be felt by Brits abroad, says Trumper. “If holidaymakers can save hundreds of pounds on their summer holiday, the amounts saved by investors could run into thousands.”

World First Blog piece

Bad news for exporters and homeowners Larry Elliott and Phillip Inman, writing in The Guardian, share the concerns of Alderson from CEBR, but dig deeper to explore how the strength of sterling could make life tougher for exporters and homeowners. 

They suggest that the strong pound will “widen the UK’s record current account deficit and make it harder for the Government to achieve its aim of rebalancing the economy away from consumer-led growth”.

The article quotes Bank of England Governor Mark Carney’s lecture at Lincoln Cathedral on 16 July, where he stressed the dangers of a strong pound to British exports. Carney said: “Sterling has appreciated around 18% over the past two years and around 7% since the turn of the year. This will exert a drag on inflation both through lowering import costs and by lowering world demand for UK goods.”

The Guardian opinion

Seen a blog, news story or discussion online that you think might interest CISI members? Email joanna.lewin@wardour.co.uk 
Published: 24 Jul 2015
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Tags:
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  • Word on the web

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