Slumping sterling

Should Labour welcome the fall in the pound? Former Labour Leave chair John Mills and Labour Business executive committee member Karen Landles debate

John Mills

In the 1970s the British economy was none too competitive. But between 1977 and 1981, during the height of enthusiasm for monetarism our real exchange rate rose by about 60 per cent – with disastrous consequences for British industry. Between 1970 and 1990, the proportion of UK gross domestic product coming from manufacturing fell from 32 per cent to 20 per cent.

Wind forward to the late 1990s when takeover liberalisation – promoted by Labour when the Monopolies and Mergers Commission was replaced by the Competition Commission and the public interest test for takeover was abandoned – led, from an already high base, to another huge increase in the exchange rate to $2 to the pound. By the early 2010s, manufacturing as a percentage of GDP was down to barely 10 per cent.

This tale of deindustrialisation matters hugely. It is light industry which, more than any other sector of the economy, generates productivity increases and rises in living standards. We still depend much more on goods than services to pay our way in the world and we simply do not manufacture enough of them these days to avoid huge balance of payments deficits every year. Manufacturing also pays much higher wages than the average. With eight per cent of our labour force producing 10 per cent of our output, gross value added is 25 per cent higher on average in manufacturing than it is in services.

So what has our overvalued currency done for us? Because of deindustrialisation, physical investment has tumbled to less than 13 per cent of GDP compared to a world average of about 25 per cent and nearly 50 per cent in China. Lack of investment is the main reason why productivity is static and real wages are stuck. We have chronic balance of payments problems, financed by borrowing and wholesale sell-offs of UK assets.

As a country, as consumers and through our government we are running up debt which we will never be able to repay. What growth we have achieved has been driven by ultra-low interest rates, asset inflation, equity realisation and consumer demand, instead of net trade and investment. Inequality has become greater and greater not only in terms of income but wealth and every aspect of life chances.

And there is now a huge political dimension to all this. Why did Brexit happen and why was Donald Trump elected? It is because right across the west – which has seen similar exchange rate trends to the UK – far too many good jobs have disappeared to the Pacific rim, leaving insecure, low productivity, low-paid jobs in their place. In the UK, at the end of 2016, the median wage is still well below what it was ten years ago.

What can be done? We need a much lower exchange rate – one which is low enough to get light industry relocating to the UK, probably between $1 and $1.10 to the pound. The only way to get manufacturing back is to make it profitable. Before the European Union referendum when the rate was $1.45, this gap looked impossible. From $1.25 or so it looks much more feasible.

With the right kind of sustainable demand in place, instead of dealing with symptoms rather than the root causes for the imbalances in our economy, all the supply side policies which everyone advocates are all start making sense. Why don’t we go for it?

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John Mills is a business owner and was chair of Labour Leave. He tweets at @John_mills_jml

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Karen Landles

Our economic trends since Brexit have been better than expected. Consumers are spending – seemingly fed up of austerity. So why, then, is the market holding back, showing such uncertainty? From the time results started to come through on the night of the referendum, sterling has come under pressure, falling 10 per cent in the immediate aftermath. Economic theory tells us that a lower rate of exchange will aid exports, and thus our manufacturing, but this is not the whole picture. Our fluctuating pound is not part of a carefully thought out economic strategy; the weakened state of the pound is an indication of just how anxious investors are about the future of our economy.

If we have a weaker pound, we are told, then exporting becomes easier as our relative prices overseas come down, but that does not chime with reality on the ground. According to the Confederation of British Industry, assessing the market in October 2016, the majority of exporting manufacturing firms said that ‘the fall in the pound since June had a negative impact on their business’. In a supplementary question, 47 per cent of manufacturing firms cited sterling’s depreciation as having a negative impact, against 32 per cent citing a positive impact.

What we are seeing is that it costs British companies more to buy raw material. I was talking just this week with a business structuring expert who told me of a small manufacturer of high quality chocolate who has seen the cost of raw materials rocket by 15 per cent. That is a hefty increase to hope to make back selling abroad. In addition it hits the domestic market hard. And it is not just a threat to small and medium-sized enterprises, as Rain Newton-Smith, CBI chief economist, points out: ‘Manufacturers are optimistic about export prospects and export orders are growing, following the fall in sterling. However, the weaker pound is also feeding through to costs, which are rising briskly and may well spill over into higher consumer prices in the months ahead.’

A weaker pound, an indication of a weakened economy, is a threat to our exports and our domestic market.

I am leaving aside the question of exactly who we expect to be exporting to in the near future with the complications of additional tariffs, since it is not part of this debate, but it is worth mentioning since it is the fear of Brexit that is at the heart of the current problem. I do not see Nissan confident about its future here, or the future of the 7,000 employees in Sunderland, despite the falling pound.

These rising costs, of course, are not just for manufacturers. The CBI economist talked about increases spilling over, a fear echoed by governor of the Bank of England Mark Carney who this month warned that living costs are expected to rise and consumption costs outpace earnings growth.

On 31 January 1953 the pound bought 11.72 German marks. By 31 December 2001 (the day before the introduction of the euro), the pound bought just 3.21. Whose economy is stronger? Whose workers are better paid?

Brexit has been an act of self-harm; a weakened pound feels a bit like medieval bloodletting with an already fragile patient rather than a thought through strategy for healing our economy.

 

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Karen Landles is a member of the Labour Business executive committee. She tweets at @karenlandles

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Comments: 1...

  1. On February 16, 2017 at 3:27 pm David Jackson responded with... #

    The proof has to be in the past experience and there’s no evidence the so called “j” curve has ever benefitted manufacturing when there has been a devaluation rising costs and inflation have quickly cancelled out any benefits. If we imported less of our raw and part finished goods there may be a discussion but as with Harold’s “the pound in your pocket is safe” the next stage is increased inflation not to be missed.

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