The Benefits of a Weak Pound for the UK
It seems to me that many people are currently in crisis over the fact that we have a weak pound due to the exchange rate plummeting again last week – and I don’t blame them. We are currently in the depths of uncertainty after the result of Brexit and the resignation of the Prime Minister David Cameron, and now various other states/countries are questioning whether or not they should have their own independence.
I’m not here to explain to you how or why the pound has dropped, there are a wealth of experts to tell you that. But I’m here to try and provide you with a brighter note, and explain how we can benefit from a weak pound. I’m not looking at this with rose tinted glasses, I know that there is a lot of negative impact that the weakening of the pound has, but we all could do with some positive thinking every now and again.
This article will look at two key areas that provide the UK with income: exports and tourism. Of course this isn’t the limit to the benefits of a weak pound, but they are two main areas that provide the economy with a solid income.
Exports
The first way in which we can benefit the cheaper pound is the exportation side of the market. The manufacturing industry accounts for 18% of GDP and exports are now a lot cheaper in ‘global terms.’[1][2] With a weak pound, businesses exporting internationally should see a rise in their profitability. Before the major drop in the summer spurred on by Brexit, business manufacturers were feeling a slowdown in their factories due to the strength of the pound. This was because new and existing clients who would usually buy from the UK could find it cheaper elsewhere and therefore the competition with other countries was much tougher.
Now that the pound has fallen, the UK export market is a lot more competitive.[3] Ben Chu at The Independent reports that ‘UK manufacturing firms are reporting strong growth in export orders since the referendum vote’, and the original fall of the pound.[4] Goods are now a lot cheaper to export and this could help lift that lagging demand and generate more money for the economy.[5] Other countries will see their currency go much further when importing from Britain now and will hopefully be encouraged to buy much more from the UK than before. In addition, ‘The current account deficit should improve as the value of exports rises relative to the value of imports.’[6]
Companies that have benefited from a weak pound
The largest export we have in this country is now cars. The UK currently sells $46 billion cars to countries abroad every year.[7] This means the UK car manufacturing industry is more profitable as the pound has weakened. This is because our prices will be cheaper to other countries as their currencies go further in how much they get for their buck. Manufacturers such as Jaguar and Land Rover can make more progress against their German competition such as BMW and Lexus and possibly cement themselves in a higher position for the future.[8]
Another example in addition to car exports is our biggest net export – Scotch Whisky. This is now a lot cheaper than Brandy or Bourbon. We could see a rise in profits of Scotch not only because it is cheaper to export, but also because it is cheaper for other countries to purchase than other high-end spirits, which has eliminated some of our competition.[11]
But what exactly does this mean in numbers? Well, William Wilkes from the Wall Street Journal reports that Rolls-Royce have approximately a $2 million impact every one cent the dollar-pound rate moves. Therefore, the drop and the now weak pound will see their profits soar.[9] Furthermore, Nick Charlier, a spokesman for Brompton Bicycle, the folding bike company, states that ‘The falling pound creates opportunities to boost our sales, especially in markets with strong local currencies,’[10]
The argument against this?
People argue that even though exportation will see profit, imports will cost us much more. This is true, but there is even a benefit to this. With high import costs, the UK consumers may be more encouraged and likely to purchase goods made in the UK. This, therefore, increases the UK aggregate demand and benefits the country.[12] When the UK left the ERM in 1992 there was a rise of aggregate demand and furthermore, the depreciation of the pound helped the economy to recover as more people were buying goods from this country and the need to import decreased somewhat.[13]
Tourism
Aside from the benefits to exportation, there is also benefit to our economy from travel and tourism. British leisure, exchange, and tour companies could all benefit to a weak pound. Tourism already brings the UK a lot of money, supporting many towns and businesses across the UK. It plays a big part in our own seaside town – Bournemouth.
The drop in the exchange rate will see tourists get more pounds for their money when travelling from abroad to spend here. It will also see the prices of hotels and restaurants drop, therefore making the overall cost of the holiday/travel experience decrease. The Financial Times states that ‘The shrinking value of the pound against the euro and dollar represents an opportunity for domestic leisure companies’[14]. This is an opportunity they should exploit by reviewing the new exchange rate, implementing new prices that mean their overseas customers are still paying the same as before, but they as a company are making more profit.
Some Figures:
We can see an example of the effect of the lower exchange rate on tourism in 2014. We saw the dollar drop from around $1.71 to £1 to approximately $1.55 from early July to the end of December. This rate kept falling in 2015 until it reached $1.46. Bearing this in mind, the UK’s Office for National Statistics shows that in 2015, the number of international visits increased by over 5% compared to 2014.[15]
Furthermore, the media giving this drop all the international coverage is increasing the number of people who are considering coming to the UK for a cheap break. This is making it well known that it is currently a fantastic time for people from other countries to visit the UK because everything is cheaper. The Independent says that retail sales seem to have had a nice little boost since the referendum due to an influx of tourists.[16]
Closing Thought
And just one last little thought provoking comment to end with from a quote put forward by Ambrose Evans-Prichard from The Telegraph, ‘The slump in sterling is a blessing in disguise after years of overvaluation and helps to break the corrosive stranglehold of the financial elites over the British economy, according to a former bail-out chief for the International Monetary Fund.’[17]
If you have any thoughts on this article, please feel free to leave a comment in the comments section.
References:
[1] Tejvan Pettinger, ‘Costs and benefits of a low pound’ (10th December 2015), Economics help <http://www.economicshelp.org/blog/1061/economics/costs-and-benefits-of-a-low-pound/>
[2] Matthew Lynn, ‘Four Ways the UK can Take Advantage of a Weaker Pound’, (10th October 2016) The Telegraph <http://www.telegraph.co.uk/business/2016/10/10/four-ways-the-uk-can-take-advantage-of-a-weaker-pound/>
[3] Tejvan Pettinger, ‘Costs and benefits of a low pound’ (10th December 2015), Economics help <http://www.economicshelp.org/blog/1061/economics/costs-and-benefits-of-a-low-pound/>
[4] Ben Chu, ‘7 Ways the Fall in the Value of the Pound Effects Us All’, (4th October 2016) The independent 4th <http://www.independent.co.uk/news/business/news/pound-sterling-value-dollar-euro-drop-latest-how-will-it-affect-me-holidays-travel-a7344861.html>
[5] Katy Allen ‘Why is the pound falling and what are the implications for Britain’, (22nd February 2016) <https://www.theguardian.com/politics/2016/feb/22/why-is-the-pound-falling-britain-sterling-dollar-uk-credit-vote-eu>
[6] Tejvan Pettinger, ‘Costs and benefits of a low pound’ (10th December 2015), Economics help <http://www.economicshelp.org/blog/1061/economics/costs-and-benefits-of-a-low-pound/>
[7] Matthew Lynn, ‘Four Ways the UK can Take Advantage of a Weaker Pound’, The Telegraph
[8] Matthew Lynn, ‘Four Ways the UK can Take Advantage of a Weaker Pound’, (10th October 2016) The Telegraph <http://www.telegraph.co.uk/business/2016/10/10/four-ways-the-uk-can-take-advantage-of-a-weaker-pound/>
[9] William Wilkes, Pound’s plunge benefits some business, punishes others’ (3rd July 2016), The Wall Street Journal, July 3rd 2016 <http://www.wsj.com/articles/pounds-plummet-benefits-some-businesses-punishes-others-1467569043>
[10] ibid.
[11] Matthew Lynn, ‘Four Ways the UK can Take Advantage of a Weaker Pound’, (10th October 2016) The Telegraph <http://www.telegraph.co.uk/business/2016/10/10/four-ways-the-uk-can-take-advantage-of-a-weaker-pound/>
[12] Tejvan Pettinger, ‘Costs and benefits of a low pound’ (10th December 2015), Economics help <http://www.economicshelp.org/blog/1061/economics/costs-and-benefits-of-a-low-pound/>
[13] ibid.
[14] Murad Ahmed& Paul McClean, ‘UK Tourism set to benefit from weak pound’ (27th June 2016) Financial Times 27th <https://www.ft.com/content/081baa36-3c73-11e6-9f2c-36b487ebd80a>
[15] ibid.
[16] Ben Chu, ‘7 Ways the Fall in the Value of the Pound Effects Us All’, (4th October 2016) The Independent, <http://www.independent.co.uk/news/business/news/pound-sterling-value-dollar-euro-drop-latest-how-will-it-affect-me-holidays-travel-a7344861.html>
[17] Ambrose Evans-Pritchard, ‘Britain should embrace weaker pound and it needs to fall further says former BoE governor and currency guru’, (10th October 2016), The Telegraph <http://www.telegraph.co.uk/business/2016/10/10/currency-guru-says-pound-slide-liberates-uk-from-malign-grip-of/>
