Posts Tagged ‘uk competitiveness’

Woe is us. The pound is crashing. You would need to rewind the clock back all the way to October 2011 to find the last time the sterling euro exchange rate was so low, or so was the case at 9.30 am 25 February 2013. Come to think of it, October 2011 wasn’t actually that long ago. But hey, let’s not ride against the tide, the media says the pound is crashing; that this is bad, so let’s run with the crowd.

Except before we do that, let’s turn to the minutes from the Bank of England’s MPC published a few days before Christmas last year. The minutes stated: “The gradual appreciation of sterling between mid-2011 and mid-2012, as prospects for the euro area had deteriorated, had been unwelcome.” Errr what was that? The appreciation of sterling has been “unwelcome.”  Can you say that a rise in the pound is bad, and a fall in the pound is bad? Does that add up?

The minutes continued: “Although the nominal effective exchange rate remained well below its pre-crisis level, some measures of sterling’s real exchange rate provided a less comforting view of the improvement in UK competitiveness. In particular, a measure  based on relative manufacturing unit labour costs was now only 10 per cent below its level in 2007, and just  5 per cent below its average in the decade prior to the depreciation. It was therefore possible that the real exchange rate consistent with current account balance might be lower than its current value.”

Let’s put it this way, back in December, the MPC had a wish for a Christmas present. Their letter to the man in Lapland said: “Dear Santa, please may I have a cheaper pound”.  Their wish was not granted in one go. But it has been granted in stages. Sterling fell in January, stayed pretty static for the first half of February, then – after Moody’s cut the UK’s triple A credit rating – fell some more.

From the point of view of UK plc we may be getting the best of both worlds. Because of all that talk of currency wars at the recent G20, neither the UK government nor the Bank of England are allowed to deliberately push the pound downwards. Well there is no need. Moody’s is doing the job instead.

All praise be to the credit ratings agencies.

Some say that this shows the UK is bankrupt; on the road to ruin. Why can’t we do things like Japan, which lost its triple A credit rating years ago, or the US, or France, both of which lost their top notch rating some time ago.

It is embarrassing for poor old George. Mr Osborne invested a lot of political capital in saying he had to follow the policies he was adopting in order to avoid the disaster of the UK losing its triple A rating. Now that rating is lost, it is quite hard for him to say: “it doesn’t matter.” Although in truth it probably doesn’t.

In part sterling’s fall is down to the view that other economies are picking up. The Fed has hinted that QE may be drawing to a close; China’s central bank is tightening monetary policy. The markets still seem to think, somewhat inexplicably, that the euro is past its worst.

Talking of inexplicable, some economists think the key to the UK’s recovery is lower inflation, so that wage growth outpaces growth in consumer prices. Others think the recovery lies with a cheaper pound giving exporters a lift. But since a falling pound will lead to inflation, you can’t have both.

The trouble with the UK exporting its way out of trouble is that such a strategy can only work if firstly, UK exporters combine their terms of trade advances with investment and productivity improvements, and secondly if demand abroad is growing.

The first condition requires more investment – something the banks seem unable to promote. Unless QE is directed more precisely, and targeted in the form of investment in companies, especially exporters and innovators, the first condition probably won’t be met. As for the second, there is nothing, absolutely nothing, that either the Bank of England or George Osborne can do about that.

©2012 Investment and Business News.

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One offs. In Monty Python’s ‘Life of Brian’, Reg said: “Apart from better sanitation and medicine and education and irrigation and public health and roads and a freshwater system and baths and public order… what have the Romans done for us?” The answer, of course, was “peace.”

Apart from rising food prices, petrol, gas bills, water, what makes you think inflation isn’t falling? To which the answer might come: “but even core inflation – with food and energy taken out – was 2.6 per cent last month.”

Okay, it’s not quite as catchy as Monty Python, but you get the point. How long must we suffer one-offs before they stop being called one-offs?

In fairness, there is not much of a relationship between monetary policy in the UK and the global hike in food prices. There may be a vague relationship with the price of oil and gas, because QE pushes up asset prices, and some speculators may buy oil as an alternative to holding government bonds. But frankly the relationship may be pretty flimsy.

But QE has influenced UK inflation in another way. It has pushed down on sterling. If it wasn’t for QE, it’s not unreasonable to assume the pound would be much higher in value today. The thing is that when a currency falls, there is kind of inflationary ricochet effect. The price of goods we import when our currency drops doesn’t all happen in one go. The price rises that occurred as a result of sterling falls in 2008 and 2009 are only just beginning to ebb.

Yesterday saw the release of the latest minutes from the Bank of England. Usually these minutes do little more than elicit the odd snore, but this time lurking in the minutes was pretty much the economic equivalent of dynamite.

It turns out that the Bank of England’s Monetary Policy Committee (MPC) is worried about the UK’s poor trade performance and while it accepts woes in the euro are have not helped, it also reckons that the pound is too high.

This is what the minutes stated: “Although the nominal effective exchange rate remained well below its pre-crisis level, some measures of sterling’s real exchange rate provided a less comforting view of the improvement in UK competitiveness.  In particular, a measure based on relative manufacturing unit labour costs was now only 10 per cent below its level in 2007, and just  5 per cent below its average in the decade prior to the depreciation.  It was therefore possible that the real exchange rate consistent with current account balance might be lower than its current value.”

Errr, to put it another way, manufacturing competitiveness is being hit by the price of sterling.

What does this mean? Well is that a hint that next year the Bank of England will put more emphasis on pushing down the pound?

The bank’s next governor  Mark Carney and the Fed – and indeed the Bank of Japan – are apparently coming around to the view that central banks should target nominal GDP – that’s GDP without allowing for inflation. So, it appears the powers that be are becoming more relaxed about the prospect of higher inflation in the short term in order to stimulate growth.

As for sterling, the runes seem to be pointing to falls in the pound in the year ahead.

Here is the snag. Japan’s new government wants a cheap yen. Brazil wants a cheaper real, and indeed its finance minister warned about currency wars two years or so ago now. China is not too keen on the idea of letting its currency rise, and some say Obama wants to destroy the value of the dollar. Oh yes, Greece, Spain, and at least half of the euro area desperately need a cheaper currency.

And by the way, on the subject of currency wars, Mervyn King recently warned of this danger too.

So there you have it, next year will be the year when all currencies will fall. It will also be the year when every team in the Premiership wins all its matches.

The alternative is currency stability. So what might currency stability do for us? Erm “peace”?

©2012 Investment and Business News.

Investment and Business News is a succinct, sometimes amusing often thought provoking and always informative email newsletter. Our readers say they look forward to receiving it, and so will you. Sign-up here