The downside to a weak pound is immediately apparent because imports get dearer and foreign holidays get more expensive. With sterling at its lowest level for eight years, there have been plenty of horror stories of travellers from the UK being gouged by foreign exchange bureaux.
The benefits of a weaker currency tend to be less obvious but are potentially significant nonetheless. Exports become cheaper and the UK becomes a more attractive destination for overseas tourists. This leads to an improvement in the balance of payments, something that is sorely needed in Britain’s case.
A breakdown of the UK’s latest growth figures shows that the impact of a lower pound on consumption is coming through much more quickly than its impact on trade. A year after the sharp depreciation of the pound in the wake of the Brexit vote, household spending growth has virtually stalled. Some of that was due to consumers bringing forward purchases of new cars in order to beat changes in vehicle excise duty but for the most part it was a response to the squeeze on living standards caused by the sterling-induced jump in the cost of living.
Meanwhile, net trade – which measures how imports and exports have changed over the latest quarter – contributed a big fat zero to growth in the three months to June. A supreme optimist might point to the J-curve effect – the tendency for the trade figures to get worse before they get better after a depreciation – but the truth is that there should have been a discernible improvement in net trade by now, particularly with the global economy doing a bit better.
Britain runs a healthy trade surplus in services, but demand for lawyers, architects and management consultants tends not to be price sensitive, so a falling pound makes little real difference.
The real problem is that Britain’s manufacturing base is now too small to take advantage of a more competitive exchange rate. The capacity simply isn’t there.