The fall in the value of the pound.

Following its drop after the referendum, sterling is currently one of the worst performing currencies in the world, comparable with those of Malawi and Haiti , and there has been much written recently about  its decline and whether it is beneficial or not? Economists, who frequently assume “ceteris paribus” in order to analyse the effects of a change in a variable without having to worry about the way real life intrudes on economic theory, find this a difficult question.The answer depends a great deal on who is answering. If you went to the USA at half term then your overseas spending is likely to have cost you about 17% more than it would have done before the vote. However if you are a car manufacturer, given that about three quarters of your output is sold overseas, you are likely to be smiling, as are many UK online businesses and those in the tourist industry. However it is possible that exports will fail to  rise and imports fall sufficiently to benefit the economy. Recent history has suggested that the UK is  wedded to expensive, high quality imports and therefore the positive effects of the devaluation will be small.

The current economic situation does not provide much of a guide.GDP growth is higher than expected at 0.5% and employment has remained at a record high for the three months to August. However consumer surveys reveal fears that inflation will exceed wage increases and  eat into living standards, reducing real consumption.

Fuel prices have risen, Apple increased the price of its computers by approximately 20% last week , Greggs has warned of price increases next year partly due to a rise in the price of overseas ingredients and Marmite has also been in the news. Although inflation has risen to 1.0%, only a part of this, such as rising fuel prices (since oil is priced in dollars) is due to the fall in sterling and the drop in the value of sterling will increase inflation for some time to come. As a result, UK living standards might fall. Nevertheless it is possible, according to economic theory, that the fall in the value of the pound will, after a time lag (the J Curve effect) cause export values to increase and import values to fall  (as long as demand for UK exports and imports are sufficiently elastic) and therefore  output and employment in export and import substitute industries could well increase. If this is correct,  one will be comparing a significant increase in well-being for a small sector of the population- those newly employed – with a small drop in living standards for those paying higher prices for fuel and Marmite.

Finally, if you think you are happy with all the possibilities discussed above, remember that we still have to factor in possible tariffs on imports, depending on what sort of agreement the UK reaches with the EU..


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