Sterling’s plunge since Britain voted to leave the European Union was the biggest in more than 40 years, but its boost to UK exports may well be far less than after similar tumbles in 1992 and 2008.
A fragile world economy, more complex world supply chains and near-zero Bank of England interest rates mean Britain may be less able to take advantage of its more competitive exchange rate.
“Currency devaluation is no panacea.
Japan shows that a fall in the currency doesn’t lead you to the promised land of export growth,” said Stephen King, senior economic adviser to HSBC.
Sterling has fallen as much as 11% on a trade-weighted basis since the June 23 Brexit referendum, and 15% against the US dollar. That puts it on track to fall as much as it did in the months following Black Wednesday in 1992 and Lehman Brothers’ collapse in late 2008.
Most economists expect further declines, perhaps another 10% to below $1.20. And yet they still expect Britain’s economy to slow as a result of Brexit, maybe even slipping into recession next year. “Exporters need to continue to invest to remain competitive.
If Brexit leads to an investment freeze, the fall in the pound might not be enough to boost exports,” Christian Odendahl and John Springford at the Centre for European Reform, a research institute in London, wrote this week.
A falling pound does not automatically lead to a one-for-one boost to UK exports.
Recent estimates show that a 10% reduction in UK export prices leads to a 4% rise in exports, according to Odendahl and Springford.
They note that global trade grew by just 2.5% over the past year and will expand by even less this year, while today’s multinational production networks and supply chains mean a weaker currency helps exporters a lot less than in the past.
That said, comparisons with 1992 and 2008 are instructive. Sterling fell around 18% on a trade-weighted basis and as much as 30% against the dollar in the six months after Britain was ejected from the Exchange Rate Mechanism on 16 September, 1992, known as Black Wednesday.
Exports rose to £239bn in 1997 from £149bn in 1992, according to Britain’s Office for National Statistics, an increase of 53%. The economy grew by 15.5% to £1.28tn. Britain recorded a trade surplus in the three years to 1997, albeit no more than 0.5% of GDP in each year, but rare surpluses nonetheless.
1997 was the last year Britain exported more than it imported.
Much of the strong demand for UK exports then was down to a relatively healthy world economy, as German reunification lifted Europe and the US ‘Clinton boom’ picked up steam.
World GDP growth jumped to 3.8% in 1997 from 1.8% in 1992, according to The World Bank. The global backdrop wasn’t so benign after the “Great Recession” of 2008-09. Global growth was 4.3% in 2007, according to The World Bank, before falling to 1.8% in 2008 and only recovering to 2.4% by 2013.
Sterling’s tumble after Lehman did help fuel a 23% rebound in exports by 2013, but that was less than half the rate of growth in the five years following Black Wednesday.
The UK economy grew by just 2.2% over the 2008-13 period, ONS figures show. Unlike the years after Black Wednesday, when Britain’s current account deficit was almost eliminated in 1997, the country’s broader balance of payments position has deteriorated since 2008.
It has never been worse, with the current account deficit now more than 5% of GDP. HSBC’s King said the main reason for the post-1992 economic recovery was the Treasury and BoE’s deep interest rate cuts.
The pound’s 2008-09 depreciation failed to rebalance the UK economy away from consumption, and the fall in real wages actually made people worse off.
On Black Wednesday the Bank of England raised interest rates to 15% to try and prop up the pound, before abandoning the ERM altogether and allowing the pound to slide as it slashed rates to just above 5% by February 1994.
It was that blend of steep rate cuts, a weaker pound and the recovering global economy that proved most potent.
After Lehman, the Bank slashed rates by 400 basis points to a record low 0.5% by March 2009.
However, it was easing policy into the teeth of a global recession and along with almost every other central bank in the developed world. The Bank is expected to ease policy again via rate cuts, expanding its £375bn bond-buying programme, or both.
But with policy already stretched, many doubt how much bang for its buck the Bank can now get. Also, no one knows what Britain’s post-Brexit trade deal with the EU — where 40% of UK exports go — will look like.