April 24, 2017 by Paul Goldsmith
The fall of the value of the pound, which has been about 20% against the Dollar and the Euro since the EU Referendum last year, is often presented both by Leave voters and Economics textbooks as a ‘good thing’. It means the UK’s exports are cheaper so more will be bought, creating jobs in this country, which in turn creates demand for UK goods, which creates jobs and so on. Like everything in economics, not all of the consequences of a falling pound are good, and even the positive consequences are dependent on numerous assumptions. A conversation I had last night exemplified that.
I found myself talking to a political journalist and the CEO of a British retailer. The journalist had been in conversation with a Tory Minister in which he had suggested that after the Summer, when people had been on their holidays and realised how much more expensive everything was abroad because of the falling pound, they would be a lot less sanguine about the effect of Brexit on the pound. The Tory Minister pointed out that the pound had had its main fall in June last year, so that holiday already happened. People had in fact seemed remarkably sanguine about it. This has been the response of many Leave voters to the concerns about the UK economy over the past year. Look, they say, the disaster hasn’t happened, therefore the threats of disaster were lies. This ignores the fact that many economic consequences are long-term.
The Retail CEO was far more unequivocal about it. People forget two things, he said. Firstly, a falling pound means that imports are more expensive, and almost nothing made in Britain involves raw materials extracted in Britain, let alone manufactured. So, most British companies had seen a 20% rise in costs, which meant their prices had to go up, negating the effect of the fall in the pound on prices of British goods abroad. He also despaired at the amount of people who think a falling pound is purely about exports, given the UK has to import over 50% of its food, so prices for the poorest in society have actually gone up. So that’s one thing about the fall in the pound – it leads to a rise in the cost of living in the UK.
But there are then the assumptions about the effect of the fall in the pound on exports. The assumption is that people will buy UK goods. This further assumes their income is either the same or rising, which is not neccessarily the case in many of our trading partners. But that isn’t all. There is a bigger problem.
In the month after the Brexit vote, this Retail CEO’s company had three deals cancelled by major European countries. These deals involve distribution and retail in those countries. They were cancelled for two reasons, one that might be solved, and one that is far more serious long-term.
The first reason is that in two years’ time British goods may well have tariffs put on them, because a free trade deal may not be made. In that case any advantage conferred by a cheaper pound (which he had already said weren’t definite) would be offset by the tariffs adding to the prices, making British goods relatively uncompetitive.
But that wasn’t the biggest problem. The biggest problem was that he was told by these potential European partners that the British brand, in one day last year, became tarnished. People were simply less likely to buy British goods, regardless of price, because people, well, didn’t like Britain anymore. Britain wasn’t cool, Britain wasn’t European. Britain was now a manufactura non grata.
The effect of this on British exports in the long term could be enormous. All this retail CEO knows is that the deals were cancelled, and the reasons given for them. For a falling pound to work on behalf of British businesses, people need to actually be willing and able to buy British goods.
That said, this man is a Remain voter. So maybe he, in the words of the Leave campaign leaders and newspapers, is ‘talking down Britain’.
Or maybe he is just telling the truth?