econintersect.com
       
  

FREE NEWSLETTER: Econintersect sends a nightly newsletter highlighting news events of the day, and providing a summary of new articles posted on the website. Econintersect will not sell or pass your email address to others per our privacy policy. You can cancel this subscription at any time by selecting the unsubscribing link in the footer of each email.



posted on 06 July 2016

Explainer: What A Weaker Pound Means For The British Economy

from The Conversation

-- this post authored by Duncan Connors, Durham University

The value of the pound dropped off a small cliff when it became clear that Britain had voted to leave the European Union. But this is not necessarily a bad thing. Simple economics dictates that a falling currency is good for exports - so in theory the fall could be beneficial for the UK economy.

But currency movements in either direction have consequences. If a currency is too weak, then you have an oversupply of money and fast inflationary growth, while if it is too strong you have an undersupply and slow but steady growth.

An oversupply of money reduces the value of a currency and leads to an inflated economy as interest rates are too low and the money is cheap and abundant. This happened in Greece with the euro before the financial crisis when an oversupply of money led to an unstable, inflationary economy.

With an undersupply of money the economy stagnates, as interest rates are too high, the value of a currency increases and money is therefore expensive. This is what happened in the UK during its time in the European Exchange Rate Mechanism (1990 to 1992) and also Greece after 2008 as the euro switched from being too cheap for the country to too expensive.

So the answer to whether or not a fall in your currency is a good thing depends on how and where you spend it, as well as the relationship between your country's economic activity and the outside world. The claim that a weakened currency makes exports cheaper is true, but this is a short-term gain that comes with a proviso: what about the imports that those exports rely on, such as raw materials?

An estimated 50% of UK exports rely on imported components. These will become more expensive as the pound falls. So the gains made from a growth in exports will be limited.

Brexit's effect on the pound. xe.com

A weaker currency can have more negative effects, too. It is often associated with low productivity growth and inflation due to an increase in the demand for retail goods and services. Take China's currency: the renminbi is systematically undervalued to keep its exports competitive, but the country has a problem of low productivity because its products remain cheap without the need for investment in production.

Finance crunch

The main issue for the UK, however, is that one of its biggest industries will suffer from the hit to the pound - financial services. Financial services contributed 14.5% towards British GDP in 2014, as opposed to 11% for manufacturing and 7% for construction. Plus, finance is part of an overall service sector that forms 80% of UK GDP. The country's finance industry is likely to suffer because it is built on foreign investment that puts its faith in a strong pound.

This includes investment in stocks and other financial instruments, government debt and activities such as property investment in London or regional centres such as Manchester. A weak pound will eat into these profits. For example, house prices in London rose by 10.8% in 2015 and yet the pound has fallen by around 12% - so an overseas investor that purchased a London property during the past 12 months effectively had their profits wiped out this week.

Exports won't offset losses to the finance industry. Martin Charles Hatch / Shutterstock.com

And even without major losses this will have an effect on demand. A fall in buyers will lead to lower prices and if investors offload properties to recoup at least some money then prices will fall further.

This is a good thing for those priced out of buying a London home by Russian and Chinese plutocrats inflating the London property market as prices in the capital will fall. One of Singapore's largest lenders has suspended its loan programme for London properties, for example, following the 10% rise in its currency against the pound. But if you work in finance or construction there is less reason to celebrate, as the fall in the pound could lead to job losses in these sectors.

In short, whether a fall in the value of a currency is good or bad depends on imports and exports, and the type of economy a country has. As the UK's economy is centred on an influx of money to invest in its finance industry - which requires a strong currency to produce returns - it will feel the crunch. Claims that the fall in the pound are good for exports fail to take this into account.

The ConversationDuncan Connors, Teaching Fellow in Finance and Economics, Durham University

This article was originally published on The Conversation. Read the original article.

>>>>> Scroll down to view and make comments <<<<<<

Click here for Historical News Post Listing










Make a Comment

Econintersect wants your comments, data and opinion on the articles posted.  As the internet is a "war zone" of trolls, hackers and spammers - Econintersect must balance its defences against ease of commenting.  We have joined with Livefyre to manage our comment streams.

To comment, using Livefyre just click the "Sign In" button at the top-left corner of the comment box below. You can create a commenting account using your favorite social network such as Twitter, Facebook, Google+, LinkedIn or Open ID - or open a Livefyre account using your email address.



You can also comment using Facebook directly using he comment block below.





Econintersect Contributors


search_box

Print this page or create a PDF file of this page
Print Friendly and PDF


The growing use of ad blocking software is creating a shortfall in covering our fixed expenses. Please consider a donation to Econintersect to allow continuing output of quality and balanced financial and economic news and analysis.


Take a look at what is going on inside of Econintersect.com
Main Home
Analysis Blog
Wasteful Health Care Spending
Democratic Development Lowers the Cost of Credit
News Blog
Infographic Of The Day: Best Places In The World To Be A Doctor
Early Headlines: Asia Stocks Mixed, Oil, Gold, Dollar Little Changed, GOP ACA Divide, Trump Budget, UK Economy Concerns, France Inflation Slows, India Tax Reform, Oz Mortgage Leverage And More
February 27, 2017 Weather and Climate Report. Short-term Forecasting Not So Easy.
Explainer: What Is VX Nerve Agent And How Does It Work?
What's Important To The Online Shopper
How Liverpool's New Local Currency Fits Into Global Trends Of Money And Power
World's Largest B2C E-Commerce Markets
Average Gasoline Prices for Week Ending 27 February 2017 Rose Over One Cent
What We Read Today 27 February 2017
February 2017 Texas Manufacturing Survey Continues to Expand But Key Internals Declined
January 2017 Pending Home Sales Index Declines
PEOPLE ARE AWESOME 2017 Amazing Talented Kids Compilation
Durable Goods New Orders Improved in January 2017
Investing Blog
Market And Sector Analysis 26 February 2017
Trump's Address To Congress: A Preview For Investors
Opinion Blog
Brave New World: The Pill-popping, Social Media Obsessed Dystopia We Live In
What Do You Call A Lie Constructed From Other Lies?
Precious Metals Blog
Deflation And Gold: A Contrarian View
Live Markets
27Feb2017 Market Close: The Trump Bull Rally Lumbers On Despite Bearish Analysts Calls For Caution, US Dollar Settles Higher, WTI Crude End Session In The Low 54 Handle
Amazon Books & More






.... and keep up with economic news using our dynamic economic newspapers with the largest international coverage on the internet
Asia / Pacific
Europe
Middle East / Africa
Americas
USA Government





























 navigate econintersect.com

Blogs

Analysis Blog
News Blog
Investing Blog
Opinion Blog
Precious Metals Blog
Markets Blog
Video of the Day
Weather

Newspapers

Asia / Pacific
Europe
Middle East / Africa
Americas
USA Government
     

RSS Feeds / Social Media

Combined Econintersect Feed
Google+
Facebook
Twitter
Digg

Free Newsletter

Marketplace - Books & More

Economic Forecast

Content Contribution

Contact

About

  Top Economics Site

Investing.com Contributor TalkMarkets Contributor Finance Blogs Free PageRank Checker Active Search Results Google+

This Web Page by Steven Hansen ---- Copyright 2010 - 2017 Econintersect LLC - all rights reserved