A tumbling pound is the defibrillator shock that Britain’s ailing exporters desperately needed to halt their terminal decline. That’s the message repeated on an almost daily loop by economists for Brexit.
Now that sterling has lost almost a fifth of its value against the dollar and about 14% against the euro since the referendum, it follows that the EU referendum vote was the best thing that could happen to the economy.
Almost overnight, manufacturers have found the price of their goods abroad have dropped, making them more competitive. They just need to let the currency work for them, revving up production safe in the knowledge they can undercut their rivals.
It is a narrow economic argument that uses Germany’s exporting prowess as a template. This success is all about exporting upmarket cars, trucks and machine tools to China, Brazil and the Middle East.
German goods are well designed and reliable, of course. They also come with the added bonus of being priced using an artificially low rate of exchange gifted by the euro.
It is safe to say the rest of the world would be far less interested in German products if they were still priced in Deutschmarks, no matter how reliable or well designed they were. They would simply be too expensive.
With the euro in place, Germany has kept manufacturing at the heart of its economy, accounting for about 20% of its national income. The UK manufacturing sector accounts for less than 10%.
John Mills, the Labour-supporting businessman, has long campaigned for a lower pound. In his most recent pamphlet, The Exchange Rate, he outlines the costs of going back to an era when a strong currency created a large balance of payments deficit and a cascade of side-effects, from weak investment through to low productivity and stagnant wages.
The central premise of his argument is that once a relatively low exchange rate is established, investors and businesses have a clear view of the better profit margins on offer from exports and will invest more in the latest machinery and industrial processes.
Manufacturers that scramble day-to-day in a desperate bid to remain part of supply chains beyond the already world-beating car, aerospace and pharmaceutical industries will take risks that mean productivity jumps in leaps and bounds.
Britain needs a sunny postcard from the future now that the immediate effects of a low pound are making life difficult for consumers. Import prices are rising and already feeding into shop prices. We’ve seen the early signs: Apple added £500 to the cost of its latest MacBook Pros and Unilever’s prices, including for Marmite, leaped by more than 10% at Morrisons.
Consumer confidence surveys have dipped in the last month after a post-referendum bounce and might deteriorate further should the two things people covet the most – the latest mobile phone and a new car – increase in cost once the currency hedges that keep prices stable run out. We import all the phones and a majority of the cars we buy, so prices are going to rise some time after Christmas, if not before.
Yet the chances of mimicking Germany are slim. Firstly, there is the currency itself. We have a floating exchange rate against the rest of the world, which means it goes down in the bad times and up in the good times. Why would a manufacturing company bet on the currency staying low when a recovery in the UK’s fortunes will send it back up again. Neither the Treasury, nor the Bank of England has expressed an appetite for managing the pound.
It is impossible, they claim, arguing that Japan’s experiment with driving down its currency has run out of steam after only a couple of years. All it took was for the big investment funds to be spooked by China’s slowdown in 2015 for money to flood into Tokyo, pushing up the yen to almost where it was before the experiment started.
Japan’s answer was to flood its financial system with yet more central bank money, hoping that would depress the currency.
China responded with a devaluation of its own, which the authorities can stealthily carry out by diktat regardless of market sentiment. Closer to home, the European Central Bank has, despite its denials, used its funds as part of an unofficial programme of currency suppression for the last two years.
These examples show something else. Everyone is at it. Not just the UK. They all think the remedy for their ailing manufacturing companies is a swift devaluation. And they are better placed to do it and maintain it without making cataclysmic decisions like leaving a free trade bloc they’ve belonged to for 40 years.
A look at the texbooks and recent analysis by the International Monetary Fund would say that any cut in the exchange rate should boost the supply of goods for exports. But can we, hand on heart, say British boardrooms and investors are in any way primed to exploit this.
Let’s set aside the comments by the trade minister, Liam Fox, that Britain is too fat and lazy to grab the chance offered by a low pound and new trading routes. Britain has shown it is better than that. But how, after 40 years of decline, when energy costs are three times what they are in the US or China (because they have their own supplies), when the banks are still risk-averse after almost going bankrupt eight years ago, when the nation’s non-immigrant population is ageing and skills training is sliced as part of more general austerity cuts, can the UK manufacturing sector say it is poised for action?
John Mills would pull all the levers of the state to keep the pound low and offset any side-effects. Its a jigsaw puzzle of measures that needs all of the pieces to be in place. It’s a tall order.
You only need to look at what happened last week in Texas to highlight the difference between the UK and some of its European neighbours. Austrian steelmaker Voestalpine Group, one of the largest steelmakers in the world, employing more than 40,000 people , unveiled a new €550m plant in the south-western US state that will run on gas, not coke, thus reducing its emissions and costs dramatically.
The company long ago jettisoned the steel rolling mills that churn out basic commodity products, unlike British Steel, which in 1999 threw in its lot with Dutch rival Koninklijke Hoogovens in the belief that creating Corus, the world’s third largest steel producer, would be the route to success. The merged company expanded without investing and now lies stricken in the arms of Tata.
Voestalpine invested and specialised. Cheap natural gas from local Texan fields will mean it can cut its costs considerably. Its boss, Wolfgang Eder, said the annual bill for operating a similar plant in Austria would be an extra €200m a year.
A weak pound is no tonic for UK’s long-term economic recovery – The Guardian (blog)