A weak pound helps UK exports but it risks a currency civil war
AS David Cameron talks up British exports in India, it might seem good news that the pound sank yesterday. A weaker currency makes exports cheaper (to pay the price in pounds takes less foreign currency). In theory that boosts demand and, so the argument goes, rebalances the economy towards opportunities in emerging markets. It also boosts profits for UK multinationals that conduct most business overseas but report in pounds.
But UK exports are higher-grade than in the past and there isn’t much evidence today’s buyers are price-sensitive enough for this to work. Meanwhile, accounting tricks aside, on the home front we all feel the cost of a weaker pound. With the UK high street in crisis, the last thing we need are rising domestic prices, yet that is the other side of the devaluation equation: a weak pound buys fewer imports, of both raw materials and foreign-made items, raising the costs of consumer goods. That effect is worsened by high inflation, not due to fall to the official Bank of England target for two more years according to Britain’s outgoing central bank governor Sir Mervyn King last week.
As fear recedes somewhat from the Eurozone, sterling has found itself exposed. Any theoretical short term boost isn’t worth the long term hurt to businesses and household balance sheets at home.