There is good and bad news related to last month’s Brexit vote, and much of is down to sterling.
The pound has fallen. In the immediate aftermath of the vote, it dropped to a 31 year low against the dollar, although it has picked up a little bit since. It is also down against the euro, although the falls against this currency have been a lot gentler.
It is important to bear in mind, however, that the falls were much sharper in the six months or so after the crisis of 2008. The comparison may not be fair, after-all the Brexit vote was just a few weeks ago. So far the currency picture looks like this:
- In the six months after the 2008 crash, the pound dropped from roughly $1.9 to $1.5 against the US dollar and €2.07 to 1.03 against the euro.
- In the three weeks after the Brexit vote, the pound dropped from $1.5 to $1.3 and €2.7 to €1.9.
Last time around, in the years after 2008, the result of the falling pound was a sharp rise in inflation, although it took time for this happen.
This in turn led to a squeeze in real wages.
And that in a nut shell is the bad side of Brexit – at least it is from the point of view of the falling pound. This will eat into real wages, growth, and in two years or so time, we may even see growth in real wages go negative for a short while
On the good side, the cheaper pound creates an export opportunity.
The hope is that the UK, freed up from the so slow machinations of the EU, can go out and do trade deals, and the cheaper pound will in turn afford the UK’s exporters a terms of trade advantage.
Recently, Naushad Forbes, president of the Confederation of Indian Industry (CII), said that he thought it would now be much easier to agree a trade deal with the UK. He said: “It would be an agreement that would be almost made in heaven.” The FT also quoted the director-general of the CII, Chandrajit Banerjee as saying that it may be possible to reach an agreement within 12 months.
Earlier this week, Malcom Turnbull, Australia’s PM, said that he wants a new trade deal with the UK as soon as possible.
These are promising signs, and in the context of the falling pound they present real opportunity for UK exporters.The falling pound has also meant that UK companies are cheaper – in terms of market cap, when valued in foreign currencies. This may have been a factor in the recent offer by Japanese company SoftBank for UK chip designer ARM Holdings.
But there is an ugly side to all this.
We are seeing politicians talk the talk of protectionism. Facts are as follows: Trade creates wealth, protectionism, may be politically popular, but it rarely has a positive effect. In the 1930s, a phase of global protectionism was kicked off by the US when it passed The Smoot-Hawley-Act, which imposed tariffs on 20,000 goods imported into the US. This Act did not cause the US Great Depression, rather it was a reaction to it. But it surely made things much worse. Neither did the rise in global protectionism lead to World War 2, but it didn’t help. The fact is, countries are less likely to go to war if they rely on trading with each other.
This week Donald Trump said “I have a different vision for our workers. It begins with a new, fair trade policy that protects our jobs and stands up to countries that cheat — of which there are many.
“My opponent, on the other hand, has supported virtually every trade agreement that has been destroying our middle class. She supported NAFTA, and she supported China's entrance into the world trade organization. Another one of her husband's colossal mistakes and disasters. She supported the job killing trade deal with South Korea. She supported the Trans-Pacific Partnership which will not only destroy our manufacturing but it will make America subject to the rulings of foreign governments. And it is not going to happen.
“I pledge to never sign any trade agreement that hurts our workers, or that diminishes our freedom and Independence. We will never ever sign bad trade deals. America first again. American first.”
The rhetoric may be popular, the words may sound sweet, but protectionism, by any other name smells so foul, and Brexit or no Brexit, the rise in protectionism may yet turn out to be the biggest threat to the global economy.
By Michael Baxter, group editor and economics expert at Amplified Business Content