The pain of the weak currency will quickly be transferred to individuals and businesses
By Colin McLean
Until recently, most of us paid little attention to currencies. Apart from traveling abroad, books were all that mattered in everyday life.
Suddenly it’s clear how much the UK matters, much of it denominated in US dollars.
Is it possible for the UK to adapt to the collapse of the pound?
This is only the sixth and final post-World War II currency crisis, beginning with Suez in 1956 and reflecting Britain’s declining economic importance in the world.
Generally, the market does things right when it sells the pound. Over the years, the potential for export and import substitution has failed to be fully grasped. Britain lags behind in energy security and has been a major food importer for most of the last century.
British policy is more like the repeated devaluations of Italy to regain competitiveness. Even joining the euro did not stop the Italian crises.
The weakness of the pound reshaped the Scottish and British economy. For a trading nation like the UK, with an open economy, the pain will quickly be passed on to UK businesses and consumers, likely further limiting the government’s freedom of action. A jump in interest rates is likely soon, calm as it is
the initial reaction from the Bank of England was. Whether the UK government takes notice or not, international financial markets have passed their judgment.
Fears have been raised about a UK debt crisis. However, almost all of Britain’s national debt
is in pounds, and that should mean that the UK’s default on its borrowings is avoidable, even if the result will be high debt costs, a weak currency and a lot more money printing. According to data from the International Monetary Fund, the
The UK has the second-lowest public debt-to-GDP ratio in the G7; Germany is lower, but France, the United States, Italy and Japan are much higher. The pound is in line with its position against the euro five years ago, the day after the Brexit vote.
Devaluations generally act as a corrective mechanism if business confidence is sufficient to stimulate exports and import substitution. UK consumers will also be forced to make tough spending choices; although some imports are essential for life, rising prices of imported manufactured goods and vacations abroad will force the substitution of discretionary items. The drop in the pound will attract tourists, but it takes time.
All UK households are facing a sharp reduction in their real income; discretionary spending power will decline. Equities exposed to UK consumers are likely to
be particularly affected.
Many London-listed stocks are global companies, with earnings in US dollars and
Oil and gas, raw materials and pharmaceuticals are notably sources of overseas revenue, although even many of them fell after the mini-budget. It can be reversed.
In recent years, and particularly after the Brexit vote, many investors have rebalanced their portfolios to reduce investment in UK equities and move far more overseas. Many international investors simply left. This means that while most London-listed stocks have international income, more investors can now access these currencies and income streams directly from overseas markets.
Part of the pound’s record move is represented by the strength of the
US dollar itself. It seems that the United States
the economy is going through a more normal economic cycle, with typical and tried tightening from the US Federal Reserve. The
The euro has fallen to its lowest level in 20 years against the dollar, showing that the UK is not the only problem.
Ahead, a critical period for the pound and more pain for consumers and UK industry.
In recent years, the UK has developed a reputation for cautious funding, but international investors are now questioning this.
Stabilization of currency and gilts may require
a medium-term fiscal responsibility plan
Colin McLean is Managing Director of
SVM asset management.