We have to get away from these cheap lines about sterling being “hit” or suffering a “blow”, and such like. Currencies are not share prices. Sometimes it’s better, for the health of the UK economy, that the pound loses value against the currencies of our major trading partners.
The UK’s financial position, regardless of the vote for Brexit, was screaming out for a devaluation. The current account deficit, a measure of our balance of payments with the rest of the world, was 5.9% in the second quarter of this year. If sustained for too long – and the UK has running such deficits for years – a day of reckoning was bound to arrive eventually. Brexit has been the trigger.
Michael Saunders, a member of the Bank of England’s monetary policy committee, was right to sound sanguine on Tuesday. “Given the scale and persistence of the UK’s current account deficit, I would not be surprised if sterling falls further, but I am fairly agnostic as to whether any further depreciation is likely,” he said.
Consider the reverse position. What if the UK had voted to stay in the European Union and sterling, at $1.50 at the time, had risen to, say, $1.60 or $1.70? There is every chance the UK would have headed towards negative inflation, bringing a knotty set of challenges for policymakers and intensifying the imbalance between imports and exports.
None of above, of course, should be taken as meaning that Brexit will benefit the UK economy. Sterling is falling because investors believe the UK’s prospects are poorer outside the EU, and definitely bleaker if we also end up outside the single market via a hard Brexit.
That judgment, at least for the short and medium term, seems entirely correct. It is hard to see how exiting a trading bloc after 40 years of membership could be a painless process. There will be a shock, as sensible members of the leave camp conceded all along as they spoke of long-term opportunities. It is only ideologues like David Davis, the Brexit minister, who can make the ludicrously bald claim that “there will be no downside to Brexit, only a considerable upside”. Davis cannot possibly know how the UK economy will adjust to whatever arrangements follow.
But the point about the advantage of a weaker sterling still holds. A lower pound will ease the transition, even if it implies lower living standards for a while. “If all that is happening is that we are adjusting quickly to a new equilibrium, to me that is not a cause for concern”, said Saunders, again correctly.
He added that he wouldn’t want to see “ripples” in other classes of assets. Fair point. A weaker sterling would become a problem if it forced up the government’s borrowing costs. The 10-year gilt yield has risen from 0.7% to 1% this month, which has gained a lot of attention but 1% hardly screams crisis.
All bets are off, however, if gilt yields were to explode. That world would look very different – and, conceivably, could even humiliate the government into softening its negotiating stance on Brexit (which would be very welcome). But, as matters stand, sterling at $1.21 is simultaneously newsworthy and expected.
Why Pure Gym looked too pumped up
Where’s your stamina? Pure Gym has pulled its stock market float blaming “this period of market volatility”, an odd excuse given share prices appear to be in rude health.
We can concede, of course, that excitement in stock markets is centred on big multinationals with overseas earnings, rather than UK operators of low-price gyms. All the same, markets look no more volatile than they were four weeks ago when Pure Gym announced its intention to list.
True, Spanish group Telefonica has pulled its float of its infrastructure subsidiary but that hardly indicates that investors in stock market flotations are on strike. Misys, the banking software firm, hasn’t been deterred from trying to return to the public markets.
One suspects there’s a simple explanation for why fund managers viewed Pure Gym’s rumoured pricetag of £500m as too pumped up. There is already a quoted low-cost gym operator called Gym Group. If Pure Gym wouldn’t price its shares at a clear discount, why should investors buy?
Will May fold?
The cabinet is split on Theresa May’s plan to put workers on boards, reports the FT. Given the fierce lobbying against the idea by business groups, divisions are not surprising. But May has made the proposal central to her governance reforms. If she were to make it voluntary to appoint workers to boards, as the Institute of Directors suggests by way of compromise, 99% of companies wouldn’t bother. May either has to go all-in or fold; the latter course would be astonishingly weak for a new prime minister.
