Pound's Brexit plunge
unlikely to boost exports at 1992, 2008 rate
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[July 13, 2016]
By Jamie McGeever
LONDON (Reuters) - 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 percent on a trade-weighted basis
since the June 23 Brexit referendum, and 15 percent against the U.S.
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 percent
to below $1.20 <GBP=>. And yet they still expect Britain's economy
to slow as a result of Brexit, maybe even slipping into recession
"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 percent reduction in
UK export prices leads to a 4 percent rise in exports, according to
Odendahl and Springford.
They note that global trade grew by just 2.5 percent 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.
1992 VS 2008
That said, comparisons with 1992 and 2008 are instructive.
Sterling fell around 18 percent on a trade-weighted basis and as
much as 30 percent 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 239 billion pounds in 1997 from 149 billion in 1992,
according to Britain's Office for National Statistics, an increase
of 53 percent. The economy grew by 15.5 percent to 1.28 trillion
Britain recorded a trade surplus in the three years to 1997, albeit
no more than 0.5 percent of GDP in each year, but rare surpluses
nonetheless. 1997 was the last year Britain exported more than it
Much of the strong demand for UK exports then was down to a
relatively healthy world economy, as German reunification lifted
Europe and the U.S. 'Clinton boom' picked up steam. World GDP growth
jumped to 3.8 percent in 1997 from 1.8 percent 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 percent in 2007, according to The
World Bank, before falling to 1.8 percent in 2008 and only
recovering to 2.4 percent by 2013.
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Wads of British Pound Sterling banknotes are stacked in piles at the
GSA Austria (Money Service Austria) company's headquarters in Vienna
July 22, 2013. REUTERS/Leonhard Foeger/File Photo
Sterling's tumble after Lehman did help fuel a 23 percent 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 percent 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 percent 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 percent 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 percent 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
percent 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 375
billion pound bond-buying program, 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 percent of UK exports go - will look like.
"The economic risks from Brexit are skewed heavily to the downside," said Robert
Wood, UK economist at Bank of America Merrill Lynch.
(This version of the story has been refiled to clarify headline)
(Graphics by Jamie McGeever and Nigel Stephenson; Editing by Jermey Gaunt)
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