Update: This article was written in June when the media was citing the fall of the pound as the first disastrous Brexit consequence. But even I am surprised at the speed of the positive effect – even at risk of closure Port Talbot Steel mentioned below, quickly moved from loss to profitability.

A continuing gradual fall is beneficial, but sharp falls (like October) will have some negative affects (“Downsides” below updated).

 
Before and after the Brexit referendum we have had potentially self fulfilling doom and gloom economic assessments.

The long term wealth and viability of a country is determined NOT by its annual consumption BUT by what it produces, sells at home and abroad, its assets, and what it invests (production infrastructure) for the future.


In this article:

1. Benefits for Investment
2. Benefits Import/export
3. There are fewer downsides than you think
4. Inflation – good!


Benefits of a low Pound on Investment

One Remain claim was that investment in the UK may fall. In the short term, uncertainty (not helped by Cameron’s resignation) may result in falling or delayed investment.

However, due to the low pound, the foreign investor can now “buy” 10% more for their $ investment in UK industries and services; and these are now more competitive worldwide. So the UK will become a more attractive market for investment.

Benefits of the low Pound (imports/exports)

In the short term a “weak” Pound may mean you won’t ditch your old foreign built mobile for a new one each year, and have fewer pina colados on holiday.

In the medium/long term, with the country buying local products and exporting more, the UKs balance of payments, jobs, wealth and your affluence will increase.

One Brexit fear was that our exports to Europe would be more expensive due to tariffs and sales would fall. Ironically, many of our exports to Europe would now be cheaper even with EU tariffs ( averaging just 2.7% on manufactured goods). The low Pound has made our own goods much more competitive at home, in the EU, and the REST OF THE WORLD.

Even the modest fall from January to April (BEFORE the vote) resulted in 46% of British exporters reporting increased demand for their goods worldwide. The 10%20% fall, if sustained could dramatically improve our trade balance, although this may not be reflected immediately due to lag.

Simplistically:

  • overseas a UK built car competing at the $30,000 price point will now be $3,000$6,000 cheaper/profitable than its competitors.
  • in the UK at the £20,000 point the British built car will now be £2,000£4,000 cheaper than its foreign competitors.

A low pound means less foreign components in UK products and more UK components in foreign goods (see next section).

Our steel industry is now 10% more competitive, this could make all the difference between the closure and survival of an industry that is vital to our long term National and Economic Security.  Any Taxpayer subsidy would be smaller.

Our North Sea oil producers incur costs in Pounds but sell in US Dollars. So our oil production becomes 10% more profitable and marginal reserves again become viable for extraction.

Increased manufacturing will reduce the countries unhealthy reliance on Financial (and other) Services.  Of the G7 the UK has the highest reliance on Service exports. The dominance of the sector in Britain meant it was hit harder by the financial crash. Its share of the economy fell by 2.9 percentage points, while it remained roughly stable in other major economies.

What are the downsides?

Manufacturing (but not Services): some production costs will rise reducing this new competitive advantage a fraction.

Imported Components:

Just because “UK car” was using £3000 of foreign components which would now cost £3,300 it does not follow that manufacturing costs will rise by £300  and make “UK car” only £1,700 more competitive.  A UK component manufacture may have been previously been undercut by just 1% – the car manufacturer will now buy that component locally.  So the actual increase in cost of car production may be considerably less than £300.

The UK has a large highly competitive scaleable components industry. I briefly worked for one producing items like door and dashboard trim. Its UK factories not only tendered for work against foreign factories but against other UK factories in the same company!

“UK car” may have imported a part at £30.00 per car instead of buying locally at £30.30. Importing will now cost £33.00 (+10%) so “UK car” will switch to the UK manufacturer (£30.30) limiting the rise in cost to 1%.

Of course, even with increased cost, some components will still be imported; I’m just trying to demonstrate there is not a 1:1 correlation in costs pre and post depreciation.

A low pound means less foreign components in UK products and more UK components in foreign goods.

Gas and Electricity:

Although we have North Sea production, we are a net importer of oil/gas, so a low pound will impact on energy costs, and therefore negate part of the increased competitiveness of a low pound.  However this need not be the case (upcoming article).

Sharp falls in the pound and Small/Medium Enterprise import retailers:

e.g. small online companies employing 5 to 30 people in warehouse and sales support in a business importing and selling cheap “unbranded” Chinese goods.

Sharp negative exchange rate changes may not give these organisations time to adapt their businesses and cashflow to meet wage and rent costs. Resulting in bankruptcies and job losses.

Tragic for those involved, but the fall in the pound was inevitable, Brexit has helpfully triggered it. The reality is, due to the high pound, we have been importing more than we can afford. Sustained (temporarily) by debt/inward foreign capital (those £10M foreign owned London houses) and a deceptive (services dominated) GDP where we are busy paying each other to clean each others houses, serve meals, and polish fingernails but producing little to pay for our imports.

Inflation? what inflation?

“High” inflation is considered a bad thing; but many economists view inflation in developed nations is too low and that it should be between 2 and 4%.  Until recently UK inflation consistently failed to rise to the B of E’s minimum target of 2%. With the fall in the Pound predictions are that inflation will only rise to 2.3%.

Related Topics:

Coming soon:

  • Why EU/UK tariffs could be good for the economy
  • Oil/gas/nuclear power and the low pound