DGB Brexit: Sterling Falls Further, I'm Not Worried

The value of Sterling against the Dollar and the Euro continues it’s steady fall. It’s not in free-fall, and it’s still miles away from it’s 1985 low of $1.08. The headlines in the media though have been hard to avoid. There is even a sense of panic. But rather than listen to media hype, which loves a bad news story, it’s time for some perspective and a reality check. Sterling affects us all in some way, but a falling pound doesn’t spell the death of the UK economy.

Some realities

If anyone is taken by surprise by the steep fall in the value of Sterling after the Brexit vote, then you need to pull your head from out of your backside. This was always going to happen. So here’s some realities.

Fuel is going to go up in the coming weeks. Oil is bought in Dollars, so when Sterling falls against it, it costs more, therefore diesel and petrol costs more. However it’s also worth remembering that the price of oil has risen strongly in the last few weeks too. So future rises can only be partly blamed on the fall in the pound.

Food prices will go up. If fuel costs more, food costs more. However it is the imported food that is likely to increase in price, rather than British grown produce. So perhaps this presents this country with an opportunity to become more self-sufficient, and begin to refocus some grocery industry back here. Butchers and local grocers might actually be able to take advantage of this, banging the home grown drum and steal a bit of business back from the supermarkets.

Window and door prices will go up. Because we have to import a lot of our industry’s materials from abroad, raw material costs, and in turn window and door costs, are going to go up. We have already seen a number of suppliers raise their prices to installers. But I’ll say this, if we made more here, relied on foreign imports less, then maybe we would have all been less exposed to Sterling price fluctuations. A point worth pondering on. You can read more on my thoughts about the rising price of windows and doors here.

There will be anomalies such as the one we saw between Unilever and Tesco, where a dispute over the price of certain goods ended up with a 24 hour stoppage of the selling of those products. It was quickly resolved and in the end turned out to be a novelty story. Although some doom mongers have latched on to it as a warning of worse to come.

Another reality to remember is that if Sterling was to continue to drop, which it might, then the Government will step in and take measures to halt the drop. This is what happened in 1985 with the Plaza Accord. Between 1980 and 1985 the US Dollar rose 50% against it’s four biggest peers, including Sterling. It resulted in Sterling dropping to $1.08 versus the Dollar. At the time, the US, along with Germany, France, Japan and the UK, understood that this could not continue, hence the 1985 Plaza Accord was struck, which involved devaluing the Dollar which helped currency markets stabilise.

I’m not saying that something of a similar magnitude will happen again. The lay of the land is much different now to what it is then. But the Bank of England and the Government would in all likelihood step in to take measures if they thought Sterling was falling out of control.

Why I’m not worried

Sterling dropping in value brings benefits to other areas of the UK economy as it takes away advantages from others.

For example, our export market has seen a considerable boost since the fall in Sterling. It’s made our goods significantly cheaper, which boosts the export sector and the companies making the goods that are being exported. Foreign investment is the same. Cheaper Sterling equals cheaper investment costs.

I do of course acknowledge that a drop in the value of Sterling will have other impacts. Inflation will go up through higher food and fuel costs. In fact it was announced on Tuesday morning (18th October) that inflation rose to 1%. It may also slow house price rises, although reports published on Tuesday shows that house prices are still steaming ahead despite what is going on elsewhere in the economy.

But lets be honest, the Bank of England has been after a 2% inflation rate for years. The Government has been wanting to slow the pace of house price rises for a while too, to allow a parent-bound generation a chance to get on the housing ladder. These are aims and objectives that can be achieved thanks to a fall in the value of Sterling, and will provide benefits to the economy.

There will be new pressures elsewhere. The price of a weekly shop will rise. Although competition between supermarkets will keep this to an absolute minimum. Fuel is going to rise. No one likes that. Clothes made abroad and imported will go up as well.

But these aren’t reasons to throw our arms up in panic. Our economy is now forecast to comfortably avoid the widely predicted recessions pre-vote. In fact over the next five years the UK economy is forecast to grow faster than any other G7 nation. A degree of calm is required at the moment. Level heads need to be applied. And I think if we all look at our local economies, they’re probably performing stronger than you might have expected.