Thursday, December 11, 2008

Is the Pound Collapsing?

Recently, I wrote about what could cause a collapse in currencies. Does this apply to the Pound?
  • Firstly, UK inflation is low and is likely to fall.
  • The UK has a reasonably large current account deficit (about 3.5% of GDP) but it is not unmanageable. The UK doesn't have a balance of payments crisis
So the two fundamental reasons for a sharp collapse in the currency are not there.

The Pound is steadily falling because:
  • Previously it was punching above its weight - you could say it was overvalued at least against the dollar. So its current decline is in a way returning to 1996 levels when the Pound was very weak against the D-Mark
  • Large Cuts in UK interest rates which make it less attractive to save in UK
  • UK recession is deeper than anywhere else so interest rates could keep falling to 0%.
  • Speculation - Investors are making alot of money out of the falling pound; with shares in the doldrums betting on exchange rates is one of the few ways to try and make a decent return. There is an element that the weakness of the pound is feeding on itself.
Some currency traders still think the Pound could fall further, but, in 2009 I wouldn't be surprised to see the Pound recover some of its lost ground or at least stabilise.

True, the UK recession is deeper than elsewhere, but rates in Europe are likely to keep falling as Germany and France go deeper into recession as well.

People point to high levels of government borrowing in the UK. But, high levels of borrowing only have a limited impact on the exchange rate. Furthermore, UK public sector debt is not any worse than other OECD economies.

Is it a problem that the Pound is falling?

Not really. The usual inflationary impact of a falling exchange rate is muted because of the recession. It will provide some help to our beleaguered exporters.

8 comments:

James said...

The falling pound is a problem if you want to get the hell out of this hole and move to Euroland.

Help!

James. The Good Life

Anonymous said...

True.
The pound is now at the rate it had against the D-mark (nowaday they call it Euro) between 1992-1997.

The problem comes when the weak pound is supposed to help exporting.

It's simply not happening.

My guess is that this is because we do not have a decent industrial basis anymore.

So there is not apparently a bottom to bounce from.

My question is: after all this mess, is Uk gonna present itself to the world markets with the same dangerously unbalanced on the financial side mix of last 10 years?

Thanx for your great blog.

Chris

Tejvan Pettinger said...

Hi Chris,

Thanks for comment. I'll try to answer question next week.

You're right that depreciation is not really helping exports. Manufacturing only accounts for 18% of GDP these days.

The current account actually worsened last month - showing how weak export growth is.

Philip said...

Interesting that all articles about the value of the Pound forget all about the hundreds of thousands of British pensioners living in the Eurozone who are now facing financial ruin. Should we have realised that the dream of the Single Market which allowed for free movement of goods and people would turn out to be a sham? Are we the forgotten people?

Anonymous said...

Philip: But by living in another country you are effectively aiding a foreign economy.

We are surely best off spending our cash in the UK and supporting our own economy as opposed to spending it elsewhere.

I hope people decide to take their holidays in Britain this year. Granted we don't have the best weather but we have some fantastic tourist destinations (however, i'm sure my Mrs will disagree with me!).

Roderick said...

As An exporter Toque Snuff Ltd is booming. The weak pound has helped snuff become the number one commodity for two months on the trot, according to Eurostat - the EU body for monitoring economic growth by product.

Helen Highwater said...

This is why we should've joined the Euro when we could have. I would dearly roast all members of UKIP on a spit.

Anonymous said...

The Euro is heading toweards being the prime world currency (taking over from the US$). Because the UK is not in the Euro this will marginalise the UK economy. The UK is not committed to the EU because it wants to be the best pal to the US, but the US will drop the UK if it needs to protect itself.

High time the idiots in Westminster get the UK fully paid up into EUroland, currency and all.