As sterling wobbled in recent weeks, some commentators declared it to be good
for export-led growth. Such an assumption, though not fundamentally flawed, is
not quite the straight-cut bonanza it is being made out to be. A fluctuating
pound is particularly problematic for SMEs potentially lacking expertise and
means to manage foreign exchange risks.
A weaker currency works both ways. True, a correction in the pound would make
British exports more competitive. However, imported raw materials, components
and commodities trade in US dollars. Rising costs of materials would make
manufacturing dearer. While politically opportunistic assumptions of a weak
pound triggering export-led growth are recent, the currency’s troubles are
In fact, since January the pound has lost 6% against the dollar and 4%
against the euro; a currency with troubles of its own. Prior to recent losses,
it was already heavily devalued with its trade-weighted value plummeting by 30%
between the second quarter of 2007 and fourth quarter of 2008. Of all the main
currency crosses this year, the pound is the weakest. This month’s headline
grabbing pummelling of the pound began on 1 March when it plummeted by 2%
against the dollar over fears of a hung parliament coupled with a huge currency
sell-off by Prudential to find $35.5bn in its bid for AIG’s Asian operations.
Stabilising momentarily, it took another hit on 9 March, when Fitch Ratings
warned about the level of UK government debt.
This wobbly trend is likely to continue as currency traders believe a fine
line between wanting a weaker pound and markets losing faith in the UK economy
appears to have been crossed. Mark O’Sullivan, director of dealing at Currencies
Direct, feels a sense of reality has set in.
“The UK is extremely vulnerable with its huge level of debt, a fact which our
politicians seem determined to ignore. Markets need convincing that UK debt can
be reduced. But, as the pound drops, the currency markets appear to have run out
of patience. Sterling could be staring over the edge of the abyss,” he says.
If a continual decline in the value of the pound was a bonus for exporters,
where is the statistical evidence? On the contrary, trade deficit in visible
(physically made) goods widened to a 17-month high of £7.99bn in January,
according to the ONS. Concurrently, input prices for materials and fuels
purchased by the manufacturing industry rose 6.9% in the year to February and
rose 0.1% between January and February. Prices of imported materials as a whole,
including imported crude oil, rose 0.3% between January and February. ONS says
the figures reflect rises in the price of imported parts, equipment, chemicals
and other materials.
Every exporter is likely to feel the effects, regardless of operating scale.
However, SMEs lacking leverage to make greater bulk purchases and mass storage
capacity will see their already lower margins fluctuate with the currency.
Playing the currency markets could help, but anecdotal evidence suggests small
scale entrepreneurs are not masters of the art.
Unsurprisingly, without actually spelling out how, clamour from the political
classes has been growing for banks to give more help to SMEs in taking advantage
of export opportunities by providing letters of credit and showing them how to
manage foreign-exchange risks. Both these services are already available for a
price if SMEs can afford it.
The widening trade deficit also pours cold water over the hypothesis that
foreign goods would be priced out domestically by a falling pound, while British
products become more attractive abroad. Lower exports, not higher imports, were
largely to blame for the widening trade deficit. January import volumes fell
1.2%, but export volumes dipped by 6%. Not all of the dip can be attributed to
adverse weather conditions.
The UK’s share of world export markets in traded goods has declined over the
past quarter century from 5% to less than 3%. According to World Bank estimates,
last year the ten countries whose foreign sales grew fastest were all emerging
economies. The fastest-growing developed exporter was Australia, which sends
nearly 25% of its exports to India and China, mostly in the shape of raw
materials. In a global economy with cross-border supply chains, a near 30%
depreciation of the pound has clearly not bought growth like it used to.
Exporters rely on imported components much more than they used to. As its
questionable how much trade rebalancing a falling exchange rate might bring
about, the government needs to create conditions for a stable currency above
The first quarter GDP figures are due to be published on 23 April; after the
Budget but before the general election.
If the headline figure is not good, sterling will take another hit. While
that may or may not aid exports, it could send the nation to the polls amid a
full blown financial crisis.
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