A weakened currency, a key to a balanced recovery ?

It is not a breaking news but rather a statement settled in the financial landscape that sterling is weakening for a couple of years now. UK currency is at the moment sinking at his lowest level since early april. Sterling is now worth 25% less than at the beginning of 2007 and is nearly reaching the parity against euro, as it fell to 1.0947 euros. I will try firstly to explain the reasons of such a devaluation and then the consequences on the UK economy through the reading of articles from different English papers.

So, why does the sterling remain weak ? It is suffering two fronts : first of all, on a short term viewing, low UK interest rates have reduced financial inflows. Then in the medium term : “concerns about the UK public finances have raised fears of a downgrade to UK debt by credit ratings agencies.” According to the Financial Times. This paper explains that Sterling’s devaluation has been hidden by the spotlight put on dollar’s fell, though the pound remain the worst performing currency at the moment.

To the BBC News journalist, this current weakness could give a profitable lift to exportations. As a result of a fear due to high UK debt level, that has frozen financial flows, it is kind of obvious that such a devaluation in comparison with the euro (and the American dollar as well), would be a key to boost UK overseas sales. To the Central Bank, it would be helpful to UK economy to keep going with a weak currency for moments.

UK trade minister opinion sounds quite the same, according to a conference he gave in Cambridge, which is summarized by Reuters. He says that the current period is a great opportunity to export, particularly for small and medium sized businesses.

These two last articles are kind of following governments assumptions. Both journalists are supporting government actions by quoting largely members of it. But it is obvious that a feeble currency provides an advantage towards other countries when trading. Actually these two articles are not really going into consequences of such a devaluation. I found out that the last article, written by a Guardian’s journalist, provides the best analysis among what I have read despite it is quite overwhelming to go through it.

This article tries to answer a question : can a weak pound make Britain’s economy strong again ? Indeed, a weakened currency has always been seen as a symbol of national humiliation throughout years, showing off poor ability of governments to manage economic policies. Actually, it appears that the current government was concerned more about collapsing banks and soaring unemployment than about foreign exchange markets.
So, to whom this weakness would be profitable ? To Heather Stewart, it would enable manufacturers to build up high profit margins, dealing with the combination of 0.5% interest rates and an exchange rate of less than 1.10€. Of course, it is not that easy, because most of them have been sharply hit by the financial recession. As we stated before, such a weakness should be also profitable to exporters and would allow to balance UK trade’s deficit. It emphasizes the need to build a balanced recovery thanks to a more interventionist policy. But such a depreciation has bad consequences as well, it tends to boost inflation by increasing foreign goods’ price.

We have to be careful when talking about currencies value, because of course, currencies can go up as quickly as they went down, so the pound should soon get better, at least against euro, according to Graham Turner, a GFC Economics consultant. Currencies market volatility is kind of intangible, and it makes the analysis difficult to be made. That is why we have to be careful when getting into such an issue.

Heather Stewart article provides a wide analysis of the situation as well as its consequences upon UK economy, it is quite objective and tries not to throw out figures but basing its framework on quoting government members or financial analysts.

So basically, the growth remain stuck at the moment, because of the regulated banking sector braking the credit supply and a public sector which tends to cut jobs. And a weakened pound will not be bringing back a feelgood factor but it could at least lay the ground work for a further recovery.


References :

http://www.guardian.co.uk/business/2009/oct/18/sterling-devaluation-exports-heather-stewart

http://www.ft.com/cms/s/0/cd1042d2-b4eb-11de-8b17-00144feab49a.html

http://uk.reuters.com/article/idUKLG73367420091016?pageNumber=1&virtualBrandChannel=11564

http://news.bbc.co.uk/1/hi/business/8272661.stm