Economic security

Fall in Pound Shows Sovereignty’s Limits

Should we worry about sterling? Since February this year, when the referendum on the UK’s membership of the EU was announced, sterling has fallen by 15% against the US dollar. There are two significant points on this trend. In the aftermath of the Brexit vote, the value of sterling dropped by 9%. Then, at the beginning of October when the government appeared to signal a preference for a clear cut with the EU – a ‘hard’ Brexit – sterling dropped again by 6%.  The value of the currency is clearly correlated to Brexit and has been consistently indicating uneasiness about what looms ahead.

A weak currency is not much help for an economy that imports more than it exports. The UK has a significant deficit in its current account – roughly, it consumes more than it produces – and this is almost 6% of GDP. Of course, a weak currency would lower the prices of exports, but only if these goods are produced with limited inputs from imports. In a world of global supply chains this is questionable. Even assuming that weak sterling would help shifting the UK model of growth from domestic demand to exports, this adjustment will take time and is unlikely to cushion the adverse impact of Brexit on real GDP growth in the next few years.