Costs and Benefits of a Low Pound

Readers Question: What are the main reasons for the decline of the pound, and what are the costs and benefits of a low pound?

The decline of the Pound is due to:

• Cuts in interest rates
• Declining economy – causing expectation of lower interest rates
• ‘Technical positions’ dealers selling Pounds to get rid of surplus positions.
• see more reasons

A falling Pound is often looked upon with a sense of shame. A falling pound indicates a weak economy and weak purchasing power; but, a falling pound can give  benefits, especially in a recession.

Benefits of Low Pound

• Cheaper exports. A falling pound improves the competitiveness of UK exporters. (Although, exports are an increasingly small % of the economy – manufacturing accounts for 18% of GDP)
• Increases demand for domestic products. Imports are more expensive, therefore consumers are more likely to buy UK goods which increases UK aggregate demand.
• A low Pound is beneficial in times of a recession, because it is helping to increase Aggregate Demand. In 1992, when the UK left the ERM, the pound depreciated and it helped the economy recover.
• In theory the current account deficit should improve as the value of exports rises relative to the value of imports.

Costs of A Low Pound

• Expensive for UK tourists abroad. Trips to Europe become more expensive. Imported goods become more expensive. Firms who import raw materials will see higher costs
• Inflation. Falling pound can cause inflation because imports are more expensive and AD rises. But, inflation is falling anyway because of the recession.
• Less incentive to cut costs. It is argued depreciation can make exporters have less incentive to cut costs.

Basically, in a recession a falling pound is helpful, at least for the short term. The strong Yen and strong Euro are definitely causing serious problems for the Japanese and German economies.

I don’t worry about a falling Pound at moment.

• Falling value of Sterling