The Brexiteer fantasy was that a weak pound would boost the economy. Reality tells a very different story

Economists predict the pound will have lost a quarter of its pre-referendum value after a no-deal Brexit, and some people want you to think that’s a good thing

Olesya Dmitracova
Monday 07 October 2019 12:43
Boris Johnson's new Brexit plan at a glance

On 24 June 2016, the day after the Brexit vote, the pound crashed 8 per cent against the dollar and 6 per cent against the euro. In the years since, those losses have more than doubled.

But, as Brexit supporters like to point out, currency depreciation is not always a bad thing. A falling pound should make UK exports cheaper, raising demand for our goods and services abroad. Higher revenues and job creation then duly follow.

That’s the theory. The reality since the EU referendum has been rather different. Far from narrowing, our trade deficit – exports minus imports – has widened significantly since the vote. That is the simplest measure to look at, since both exports and imports tend to grow over time.

Research by three academics published by the World Economic Forum in December 2018 sheds more light on the trend in UK exports since the referendum. By using actual patterns of trade, they constructed what can be described as a parallel trade universe and concluded that since 23 June 2016, growth in British exports has been much slower than it would have been had we never voted Leave. The trend is “clear and consistent” for exports both to EU and non-EU countries, they wrote.

In recent years, there have been other examples of currencies weakening in developed countries without making much of a dent in their trade deficits.

So why is the trade theory beloved of Brexiteers not working?

One reason is a rapid increase in global trade in so-called intermediate goods and services. As opposed to finished products, these are what economists call inputs; things like engine parts, fabrics or sheets of steel.

For most people in the UK, talk of imports probably brings to mind French wine or clothes made in Bangladesh but, in fact, inputs make up the majority of what we import. We then use these to help produce goods and services for export.

The problem is, the weaker pound has made imports more expensive. British cars built with Japanese engines and chocolate made with cocoa from the Ivory Coast then also become more expensive, limiting exporters’ advantage from the pound’s depreciation.

Another effect from more expensive intermediate imports has been uncovered by researchers at the London School of Economics. They found that UK firms in many industries have responded to their higher costs by reducing workers’ wages, paid overtime and investment in training.

As a result, wages, adjusted for inflation, have either stalled or fallen since the referendum, depending on the extent the diminished pound affected each particular industry.

The hit to workers’ incomes was even more painful as it came after nearly a decade of stagnating real wages and coincided with a sharp rise in inflation, also caused by the pound’s decline.

Meanwhile, the training cutbacks will do nothing to plug Britain’s “chronic” skill gaps, the LSE researchers wrote.

It appears then that a prediction by a former Bank of England policymaker in 2017 is coming true.

“No one should fantasise that a depreciation will lead to prosperity … any more than repeated devaluations delivered sustained growth to the United Kingdom (or to Italy) in the 1960s and 1970s,” wrote Adam Posen.

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The deliberate pound devaluation of 1967 was followed by a spike in inflation and, although the economy picked up initially, over the longer term it still lagged behind other developed countries.

The early 1970s saw the beginning of another sterling crisis, triggered this time by currency traders. By 1975, inflation reached 25.9 per cent and, for a host of reasons, Britain fell into recession. The economy remained fragile for the rest of the decade, with the final years marked by mass unemployment.

The next true sterling crisis will strike if Britain leaves the EU without a deal. Economists polled by Reuters on Friday predicted that the pound will fall to $1.10-1.19 in that case. That will chop a quarter off its pre-referendum value.

It will take a heck of a boom in exports to see the bright side of such steep depreciation.

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