Is a weak pound bad for Britain?

Should we despair that the pound has slumped again today, falling below $1.14 for the first time since 1985? Or should we rejoice? It was, after all, a collapse in the pound following Black Wednesday in 1992 – along with dramatically lowered interest rates -- which precipitated a lasting economic recovery. It is all too easy to see the value of the pound as a national virility symbol, and think that the stronger it is, the better. In reality, a weak pound – or let’s say a pound set at a realistic level, which properly reflects the costs of wages, goods and services in Britain – can help stimulate the economy by making our exports relatively cheap.

Trouble is that in order to benefit from a weak pound you need export industries which are poised to seize advantage. Meanwhile, a weak pound pushes up the cost of imports, fuelling inflation – including the cost of raw materials for businesses which might otherwise benefit from greater opportunities for exports. Moreover, opportunities to increase exports are somewhat limited at a time when much of the world appears to be heading into recession. Britain’s single largest export market at present is the US, an economy which has already seen two quarters of negative growth – which would fulfil most people’s definition of a recession, if not Joe Biden’s.

The last time the pound was down at $1.14 the global economy was in a very different state. In the mid 1980s the West was enjoying a sustained economic recovery. There are two other differences, too. Then, with North Sea oil and gas flowing strongly, Britain was a net exporter of energy. In food, too, Britain reached a peak of self-sufficiency in food in the mid 1980s – producing nearly 80 percent of what was consumed here. Now, Britain is a net importer of energy and self-sufficiency in food is down to 60 percent. UK consumers, therefore, have become more exposed to imported inflation in basic needs.

While the pound is especially weak against the dollar, it is not especially weak against the Euro. While it has fallen in recent months it is still a little higher than it was prior to the pandemic. The general picture is that the dollar is appreciating and European currencies are falling; which is not unexpected given the effect of the Ukraine war on energy prices, and confidence, in Europe.

A weak pound in 1985 didn’t do Britain any harm. On the contrary, it was the beginning of the 1980s boom. But there is much reason the worry that the story will be different this time – and that the effect of a weak pound on inflation will outweigh any benefit on exporters.