What will the weak pound mean in the long run?

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20 October
17:54
October
2016

Traditionally, a weaker pound gives a boost to exporters because their goods are cheaper and therefore more attractive. So initially it will give a boost to the industrial sector and also the services sector, which is good. And since 70 per cent of our earnings, as gauged by the FTSE 100, comes from abroad, that’s extremely good for the stock market – as we’ve seen recently, where the pound is weak and the stock market is at an all-time high.

So you may think, “OK, that’s all quite successful,” but it also means that the cost of the goods that we import rises. That’s why Tesco got into a spat with its supplier, Unilever, who asked for a 10 per cent rise in the cost of Marmite – enough to cause revolution in this country. That shows there’s a direct effect of a weak pound, translating into higher prices for consumers.

The rise of the cost of living isn’t good for consumers right now because wages haven’t been increasing as fast, so it’s draining their spending power. That means that what looks like success is actually something of a sign of distress. A declining pound is in this case a sign of a lack of confidence, and yet you’re seeing apparent signs of success, like a rising stock market. It’s all a bit upside down. It gives an initial boost to the economy, but if it persists over the course of, say, the next 18 months or so – or over the Brexit process – it’s going to lead to some pretty uncomfortable and difficult times for ordinary people.

What used to happen at moments like this was that the Bank of England would jack up interest rates to create demand for the pound. But the Governor of the Bank of England, Mark Carney, is clearly against raising interest rates. That’s because he knows we still have an electorate who have borrowed heavily and are very sensitive to relatively small movements in interest rates. If you’re a mortgage-holder that’s great, but if you’re a saver it’s terrible. 

Stewart Cowley is the author of Man vs Money: Understanding the Curious Economics That Power Our World

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