Benefits of a weak pound: UK economy often performs better when sterling is allowed to depreciate, says ALEX BRUMMER
For families planning a vacation abroad this summer, the fall in the pound will not be welcome.
It’s one of the paradoxes of our times that while the headlines are talking about the cost of living, there’s enough money for airports to overflow in the face of growing demand. There doesn’t seem to be much difficulty among travelers.
The fall of the pound against the dollar to its lowest level since the pandemic hit, and lately against the euro, is largely attributed to political factors.
Pounded: The fall of the pound against the dollar to its lowest level since the pandemic hit, and lately against the euro, is largely attributed to political factors
Among the items cited are the Conservatives’ vote of confidence in Boris Johnson, the rewriting of the Northern Ireland protocol and now Nicola Sturgeon’s renewed efforts to force a Scottish referendum.
Such imprecise judgments do not make much economic sense.
If Northern Ireland joined the Republic of Ireland or Scotland cut its ties with England to become a self-governing Nordic-style state, the rest of Britain could benefit.
The Westminster tax subsidies would disappear, strengthening the fundamentals of sterling.
The pound’s current weakness is as much a dollar thing as anything else. The greenback is soaring on expectations of a sharp tightening from the Federal Reserve.
The expectation has already taken the ten-year US Treasury bond yield to a high of 3.419% in recent trades.
Ahead of the Bank of England’s interest rate decision tomorrow, the ten-year gilt yield rose sharply to 2.5%. This is still one point below what can be gained on US bonds.
Moreover, it is not just the pound that is suffering. The Japanese yen this week fell to its lowest level against the dollar since 1998, leading authorities to say they were ready to “respond appropriately”.
There is no immediate risk of Japan breaking up, which goes against the idea that the pound is particularly vulnerable politically.
There is a positive way to view the weakness of the pound. This may increase the price of imported oil, which is quoted in dollars, but British North Sea drillers are also beneficiaries, which could increase Rishi Sunak’s windfall tax proceeds.
The wider trade effects are more important. A cheaper pound makes British goods and services more affordable abroad and should be good for exports, which have lagged due to Brexit and Covid disruption.
Black Wednesday, when the pound was expelled from the exchange rate mechanism in September 1992, is considered by many to be White Wednesday, as it heralded an increase in exports and sparked robust growth, led by the then Chancellor , Ken Clarke.
A strong pound could be interpreted as a measure of economic success.
But as an open economy, Britain’s performance has often been at its best in the decades the pound was allowed to depreciate.
The least that can be expected from embattled UK listed companies is for the boards to put up a decent defense.
First Group’s interim executive chairman Matthew Gregory did just that when he turned down a £1.2bn offer from US private equity firm I Squared Capital Advisors.
The company backed the move with an impressive set of results, demonstrating the return to form of First Bus, which runs services from Aberdeen to Cornwall.
The company is also considering awarding the multi-year Great Western Railway (GWR) franchise.
Compare that to the reaction of the Go-Ahead board led by Clare Hollingsworth. He almost bit his hand on an Australian-Spanish offer from Kinetic and Globalvia.
Buyers are making all the right noises to preserve Newcastle and London offices, keep current management in place and launch a campaign towards greener electric and hydrogen vehicles.
But when it came time to upgrade, it would have been encouraging if Go-Ahead had argued for being a local, British-owned champion rather than counting the banknotes. Sellers need to be careful what they wish for.
In March, Stagecoach opted for a sale to German asset manager DWS as a local merger with National Express was on the table.
DWS is at the center of huge controversy after police and regulators raided their offices following allegations of ESG investment mis-selling.
A massive shareholder revolt saw the chief executive and supervisory board expelled. Maybe Stagecoach and its compliant investors should do the due diligence again.