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 could be 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.
- Loss of confidence, e.g. Post Brexit economy.
- See reasons for fall in value of Pound
A falling pound can indicate 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 this helped the economy to 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 also become more expensive. Firms who import raw materials will see higher costs.
- Inflation. Falling pound can cause inflation because imports are more expensive and Aggregate Demand rises. This inflation may be just temporary or it may cause higher costs.
- 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.
Winners and losers
To some extent, it depends on who you are. If you like foreign travel and purchasing imports, you will see higher costs.
If you are a business exporting abroad, it could significantly increase profitability.