Sunday, October 01, 2023
The pound's down again, but don't expect an export bonanza
Posted by David Smith at 09:00 AM
Category: David Smith's other articles

My regular column is available to subscribers on This is an excerpt. Not to be reproduced without permission.

The anniversary of the most disastrous set of fiscal announcements in recent British history – the mini budget of September 23 last year – has just passed. It is also 12 months since the lowest level ever recorded for the dollar-sterling exchange rate, just over $1.03, though not in London trading. There were plenty of other damaging effects, of course.

I mention these things, however, not as prelude to a piece on Trussageddon, having done that a couple of weeks ago, but in order the focus on the pound. It recovered when the sensible ones took over – Jeremy Hunt as chancellor, followed by Rishi Sunak as prime minister – and it continued its recovery for much of this year.

There were times when we had to get used to headlines telling us that the pound was the strongest performer among major currencies, which it was for many months earlier this year. It is not often that that happens.

Sterling’s show of strength had two aspects, good and bad. The good part was that it reflected a shift back to normal, economically literate policy and out of a period in which you did not know who was going to be chancellor at the end of the day, let alone next week. The intense political instability of the Johnson and Truss periods went away.

The other reason for sterling strength was not so good. Currency traders saw the UK as having a bigger and more persistent inflation problem than other countries and thus likely to have to raise interest rates more to bring it under control.

The good source of support for the pound is mainly still there, though having calmed things down Sunak remains under political pressure and has started to thrash around a bit, while Hunt has to hold back the Tory tide pushing him to announce unaffordable tax cuts.

What has changed in recent weeks is that the bad source of support for sterling, that based on higher inflation and interest rates than everybody else, has diminished. UK inflation at 6.7 per cent is still significantly higher than America, 3.7 per cent, and the eurozone, 4.3 per cent. But the gap is narrowing and one game-changer last month was the drop in “core” inflation from 6.9 to 6.2 per cent.

The other was the Bank of England’s decision not to raise interest rates on September 21. In the weeks leading up to that decision a quarter-point rate rise had been seen as a certainty after 14 rate rises in a row, only fading in the days leading up to it, particularly after those inflation figures.

The result is that sterling has come back down to earth, to the low $1.20s, from this year’s peak of just over $1.31 in July. And, while some of this reflects dollar strength, the pound’s average value against other currencies, measured by the sterling index, has also come down, to just above 80.

There appears to be an invisible elastic pulling sterling back to the levels it fell to when currency markets reassessed UK economic and political prospects after the EU referendum in June 2016. Then the pound fell to the low $1.20s against the dollar, which is where it is again now. There have been a couple of attempts at revival, and not just this year. During 2018 and 2021 sterling briefly rose above $1.40, the latter due to vaccine optimism, before the invisible elastic, and unforced political errors, pulled it back down again. There is a similar pattern for the sterling index and the 80 level on that index.

The Brexit-related sterling fall is thus different from that which occurred during the financial crisis, which also exposed UK vulnerability. Then the pound followed the normal pattern of recovering once the danger was over, sterling rising from a crisis low of $1.37 to more than $1.70 in the mid-2010s, and from 76 to the mid-90s on the sterling index.

There are still many people who celebrate sterling weakness, believing that a low pound is the best way to drive export performance, and who email me regularly on that very theme. The traditional Treasury view is that any advantage of devaluation/depreciation is lost in the higher inflation that arises from it.

The evidence, it should be said, favours the Treasury view. Either that or the pound is not low enough. It is, I should say, currently around 20 per cent lower than it was against a basket of currencies compared with 2005, and more than 25 per cent down on its 10 and 30-year averages against the dollar before 2016, both about $1.65.

UK exports of goods and services, properly measured, that is in volume terms, rose at a third of the pace in the past seven years compared with the previous seven, despite the pound’s big fall. They are 5 per cent lower than they were in the fourth quarter of 2019. For comparisons, in the seven years leading up to 2016, when the pound was mainly recovering from its fall during the 2008-9 financial crisis, export volumes rose by 27 per cent.

I say properly measured because you may have noticed that Kemi Badenoch, the business and trade secretary, in announcing a shake-up of the board of trade, recently highlighted a government target of increasing UK exports to £1 trillion by 2030, from £849 billion over the latest 12 months.

This could be achieved, though, if exports merely rise in line with official inflation forecasts over the next few years. The Institute of Directors, rightly, says that the only meaningful target for exports is in volume terms. It calls for a more challenging target, to raise exports to £900 billion in 2019 prices by 2030. On this volume basis, exports were £691 billion last year, so this would require something like 5 per cent a year volume growth in exports, a challenging but meaningful target. The IoD also thinks an associated and more ambitious target would be for 15 per cent of firms to become exporters by 2030, compared with just under 11.5 per cent now.

You will know that a lower pound is not the only thing to have happened to affect exports over the past few years. But what we can see is that the pound’s fall was not enough to compensate for the damage to export and economic prospects as a result of the referendum and formal exit from the EU.

As for the pandemic, which clearly disrupted international trade and affected global supply chains, other advanced economies have seen much stronger growth in exports both in the period since before the pandemic and in the years before it.

The pound, then, has come back down to earth. Though we would love to see it happen do not expect this to transform the UK’s export performance.