Foreign exchange rarely excites financial analysts as movements are almost always relatively small when compared to capital markets. But when a currency makes a 20 per cent slide in just five months then it is time to start delving deeply into the causes and likely effects of such a slide.
Sterling did in fact fall by almost 20 per cent between the Brexit referendum and mid-October. Markets seem unimpressed by the level of preparedness of the Theresa May government to make Brexit a smooth reality. “Brexit means Brexit,” May said, even if some MPs in her government are inclined to make Britain’s departure from the EU as traumatic as possible by failing to agree on the best way to secure a good deal for Britain.
The consequences of a weak sterling on the British economy are not all negative. A weak sterling will almost certainly mean that interest rates will not be reduced further by the Bank of England – partly because the UK’s real economy is not performing badly. But a weak currency will almost certainly give rise to inflation – not such a bad thing when for the past years central bankers feared deflation much more than inflation.
Sterling’s sliding path should also help British exporters sell more of their goods and services. Britain has become one of the most expensive countries in the EU to live and produce goods and services. What look like generous UK salaries often do not buy you much. No wonder British pensioners fret about their future. With a Labour Party not knowing what has hit it, May will do all she can to lure traditionally Labour voting people to look at her party as the workers’ party.
The freedom to use fiscal incentives to attract business to London will be easier
The weakness of sterling will have substantial effects on our own economy. It is being reported that many Britons are considering spending their holidays in the UK rather than travelling to the sunny Mediterranean for fear of terrorism and the fewer euros they get for their pounds.
The UK remains one of Malta’s important tourism markets. Hoteliers will do well to come up with schemes to cushion the impact of a low valued sterling when they sign contracts with UK customers. It is easy to become bullish about the future of our tourism industry because we have just had a very good year. But this success can suddenly turn into a slowdown if we do not understand the dynamics that drive this industry.
I doubt whether the weakness of sterling will entice more Maltese to travel to the UK for their holidays. Many find the cost of a holiday in the UK as far too expensive, especially if one stays in London or one of the larger cities. If prices of accommodation and catering continue to rise because of a weak sterling, then the UK tourism industry may not benefit as much as it should from their currency devaluation.
I worry about those local investors who still pour their money in sterling-denominated investments. Admittedly the FTSE 100 has seen a remarkable rise in the last few months as a result of sterling’s weakness, that make UK stocks bought in non-sterling currencies very attractive. But sterling-denominated bonds, including gilts, have fallen in price and have not benefitted at all from the currency’s devaluation.
I still believe that the long-term prospects of the British economy are better than those of most EU countries despite Brexit. What is urgently needed is a political programme that defines what needs to be done to make Brexit a reality that works for the British economy.
Longer term plans should include a reform of the British educational system that is as free as possible from political controversy. The introduction of grammar schools is an issue that is already riddled with too much ideological baggage. Britain needs to improve its productivity if it is to compete successfully in global trade of goods and services. To do this it needs a well-trained workforce – an objective that can only be achieved through better quality education.
Like the rest of the EU, Britain also needs to invest more in the productive infrastructure: better housing for struggling families, better rail and road transport, and better investment in health services. The financial services industry will initially take a knock as a result of Brexit but the freedom to use fiscal incentives to attract business to London will be easier.
Sterling’s weakness may just be a temporary phenomenon.
johncassarwhite@yahoo.com