Pound's strength 'could close UK plants'

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The strong pound is likely to inflict further damage on exports and investment in the months ahead, according to manufacturers. The Engineering Employers Federation has warned that British companies are in danger of losing out in international mergers and investment decisions because the pound has stayed so high for so long.

The strong pound is likely to inflict further damage on exports and investment in the months ahead, according to manufacturers. The Engineering Employers Federation has warned that British companies are in danger of losing out in international mergers and investment decisions because the pound has stayed so high for so long.

Martin Temple, director general of the EEF, said: "While exports are still expanding on the back of buoyant world markets, the medium-term outlook is less certain. Current low margins leave UK plants vulnerable to the worldwide restructuring of industry unless a weakening pound provides some relief."

Export volumes and inward investment into Britain have remained buoyant so far, but manufacturers have felt the pain of a high exchange rate in other ways.

John Butler, UK economist at HSBC, said: "The manufacturing sector has kept up export volumes because global demand has been growing but they have been losing market share. And their profit margins definitely haven't held up." The UK has lost market share to Euro area exporters, he said.

Michael Saunders at Schroder Salomon Smith Barney said the overvalued pound had made investments elsewhere more attractive. "The UK has seen a large and growing net outflow of M&A activity in the last three years."

Most economists believe the pound is likely to fall to a lower level long term. But such a depreciation could prove a mixed blessing, if it led the Monetary Policy Committee to raise interest rates. The Bank of England indicated in last week's Inflation Report that the possibility of a fall in the exchange rate had increased during the past quarter. If the pound did fall from its current level, it would boost the forecast inflation rate significantly.

Although the MPC's reaction would depend on what factors were driving sterling lower, the model indicates that a 10 per cent drop in sterling's trade-weighted index could add almost one percentage point to the inflation rate after two years. But speaking at a press briefing last week, Mervyn King, a deputy governor at the Bank, warned against using this rule of thumb: "It is not the case that you could judge what the long-term projection will be if the exchange rate changed at any point. You don't form a projection based on the exchange rate without forming a view about why the exchange rate has risen," he said.

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