If you are reading this and earn your living in UK currency, you are already poorer today than you were before June 2016. And you will be poorer by the end of the year if a no-deal EU exit comes to pass. If you have savings in sterling, then you’re in even more trouble.
In the post-truth world we have been living in for the past three years, there’s one thing that cannot be blagged away, cannot be accused of bias, cannot be propped up by a gust of groundless optimism – the British pound. It is quite literally a sovereign, bowing to no ideology or political pressure. As elegantly and neutrally as a force of nature, it rises and falls as it divines the direction of the country’s economy. That direction, according to the pound’s nosedive over the past few weeks, is downwards.
You might not yet have noticed what economists call “the pass-through effect”, the impact of changes in the exchange rate on domestic prices for traded and non-traded goods. But it is here. We are all experiencing it now, in some way. It’s not just holidaymakers, many of whom are shocked that they are getting fewer euros than pounds at airport exchange bureaux or ATMs (in the past week, even dollars were informally trading at parity, a significant milestone in the pound’s depreciation).
Many holidaymakers will probably be well off enough to cope with the downturn. But it’s affecting those who can’t afford foreign travel, too. Because it hits everyone’s food basket, clothes shopping, energy bills. Bank of England estimates are that a 5% depreciation eventually adds almost 1% to the price of consumer goods. Many people distrust the Bank’s forecasts. The institution made some erroneous assumptions when predicting a dramatic post-referendum slowdown. But Project Fear wasn’t entirely wrong. The rise in inflation after the 2016 vote has already cost the average household £404 a year. In just the past few days, as the prospects of no deal have increased, the pound slipped again against the dollar.
We don’t quite register these changes because they don’t hit us in a dramatic way. Like the apocryphal story of frogs in gradually heating water, boiled alive because they don’t register the temperature rise, we also may not realise what is happening until it’s too late. And even then we may not understand why, particularly if Brexiteer misinformation distracts us from the real cause. A gradual decline in living standards can have many fathers, and a hard-right government will almost certainly point the finger at immigrants, the EU, or simply those who “talk Britain down”.
We also fail to fully absorb the danger of a depreciation because of an entrenched conventional wisdom that, despite the chaos of the past three years, the Tories are a safe pair of hands on the economy. During the party’s leadership campaign, Nick Macpherson, a former permanent secretary to the Treasury, tweeted that Jeremy Hunt and Boris Johnson seem “determined to debauch” the pound. There is a whole other article to be written comparing how differently the media, civil service and the public would react if the economic headlines of recent years had been written under a Jeremy Corbyn, or indeed any Labour, government.
Can you imagine a “fuck business” Labour prime minister? A sudden unbudgeted splurge of billions of pounds to distract voters from the needless economic shock they’re about to face? The current sterling depreciation would almost certainly have been called a “run on the pound” by now. Ironically, the former chancellor, Philip Hammond, claimed a Corbyn government would cause “a crash in the value of the pound, causing a shockwave of inflation”.
Back in the real world, the pound is already being treated like a volatile emerging markets currency. Last week Edinburgh festival artists refused to be paid in sterling, demanding euros and dollars. The “debauching” of the pound is fully under way.
How much will I get for my money on holiday?
The immediate impact of a weakened pound is on holidaymakers heading to Spain and other destinations in the EU, but a collapse in the currency also has much wider implications for household finances.
At some UK airports, the pound has already been seen at worth less than a euro, and the same as a dollar. Sensible travellers know to buy their currency in advance online, avoiding the airport bureaux, which gives you better rates.
Should I change my money now or wait for sterling to recover?
A tough one. In July Sterling had its worst month since October 2016 as it lost 4.3%. But it could get a whole lot worse. With the political rhetoric as it is, a rebound in sterling much before the 31 October Brexit deadline now looks unlikely.
What other effects does a fall in sterling have on my finances?
Prices of imported goods in the shops – and that’s an awful lot of what we consume as a country – will have to rise. Those price tags on clothes in euros, sterling and other currencies? It won’t be long before they are adjusted again, with the price in sterling inevitably having to rise. There is a lag effect here – so the rise won’t be immediate, but it will flow through eventually.
Will interest rates go up to ‘save the pound’?
Historically, a sterling crisis usually prompted a rise in interest rates to encourage foreign speculators to hold the pound. But we’re now in very different territory. With the US and European central banks inclined to cut rates, there’s virtually a zero chance of a rate rise by the Bank of England.
Are there any winners?
Yes, tourists are the winners – just not British ones. Anyone visiting London this summer from abroad is finding it to be a top-value shopper’s paradise.
There is now a pretty predictable list of responses to bad Brexit news. The Bank of England’s forecasts are always wrong; the EU will blink at one minute to midnight; a weak pound is good for British exports. The same hubris that assumed Britain could just unhitch from the EU and make up for it through trade elsewhere underpins this outdated view of an export-boosting pound. The world has changed: very few economies, and certainly not Britain’s, are pure exporters any more.
Exports are made up of imports. Made up of parts, intellectual property, raw materials, labour – all becoming more expensive because of the falling pound. Depreciation will not only fail to render British exports more competitive, it will make them more expensive. History bears this out. Neither the depreciation following the 2008 financial crash, nor that after the 2016 referendum, significantly boosted the country’s exports.
There is no way out of the inevitable impoverishment of average British wage earners – who cannot demand their wages be paid in a different currency, or hedge by opening a foreign currency account – if a sterling fall continues. One might grumble that the constraining effects of globalisation mean there is less flexibility for a successfully integrated economy to write its own rules. But this goes to the heart of the Brexit question – there is simply no way to unglobalise the whole world so that a single country can “take back control”. Not without making life harder for those least able to cope with it, especially after almost a decade of austerity.
As we transition into a parallel universe of a Johnson government running purely on the fumes of propaganda, watch the pound. It will be your lie detector test.
• Nesrine Malik is a Guardian columnist
• This article was amended on 8 August 2019. An earlier version incorrectly said that the Bank of England predicted a post-referendum recession. This has been removed.
