How is a weak British pound affecting the UK economy


How is a weak British pound affecting the UK economy – a sterling crisis?

This article will look at the economic implications of the recent weakening sterling

On the last day of July, the British pound (Sterling) fell to its lowest level in 31 months. This came as speculation about a no deal Brexit happening increased. This article looks to explain how this affects the UK economy and more specifically trade and tourism.

At the time of this article £1 is equal to $1.21 its lowest in the last 3 years falling from $1.43 in April 2018, its strongest in the past 3 years. Because the pound can get more than a dollar to a single pound exchanged, it means that the pound has purchasing power over the dollar leading to it being cheaper for UK citizens to buy goods from America, while being more expensive for US citizens to buy from the UK.

Effect on UK imports and exports

In general, the UK now imports more goods than exports, meaning that UK consumers benefit from having a strong currency when buying goods from abroad. However, it is a double-edged sword as if you have a strong currency then it is more expensive for other countries to buy goods that have been made domestically within the UK. This along with demanded higher wages in the UK compared to competition from foreign industries, is part of what has led to the decline of the UK manufacturing industry during the 20th century.

For example, the world’s oil is priced to the dollar meaning oil and petrol price in the UK is determined by three factors:

  • the demand for oil in the world economy
  • the supply of oil to the world economy
  • the value of the pound to the US dollar

Thus, oil will indefinitely go up in price as the pound drops in value, although other factors are global, for example, global oil markets being flooded by oil supplied from the middle-east.

However, could this weakening pound become an ideal opportunity for Britain’s remaining manufacturing industries? A weakening pound makes British made products cheaper for buyers in the rest of the world, making British manufacturing more competitive with the likes of America and Germany. However, the cost of production will go up, where the manufacturers rely on imported parts from other countries.

Effects on tourists and UK holiday goers

Due to having a strong currency as well, UK residents can often go for holidays and find that items such as food will be relatively cheaper than compared to the same products in the UK. Traditionally it has been the contrary for tourists who are travelling to the UK for holiday, with items in the UK generally being more expensive for them compared to their country.

Therefore, as news of the pound’s devaluation compared to other currencies has spread, it means people who wanted to go but were on the fence because of the cost, may now consider it is more affordable for them. This has led to a general rise in the amount of tourism to the UK, which in turn has led to a boost in business for UK firms who are connected to tourism.

The countries where visitors are coming tend to be from rapidly developing countries or more specifically Asian countries. For example, the UK has experienced a 20% rise in the number of people coming from India, while having a 10% increase from Japan whilst having a 5% increase in tourism from the US.

All the while due to Brexit, uncertainty among European tourists has led to smaller growth in EU tourism to the UK with only a 2% rise on last year with most of the increase in tourism coming from Germany and the Netherlands (who are deciding to visit areas where the Tour de Yorkshire was).

Conclusion

With this we conclude that a weak pound certainly brings both benefits and disadvantages, firstly with Britain being a net importer a decreasing value in pound would lead to a greater deficit in the balance of payments. But at the same time could lead to a decrease in Britain’s deficit in its balance of trade, as British produced goods and services would become more competitive. While the lower valued pound will boost tourism and related industries, it will make holidays for UK citizens more expensive.

End of article: How is a weak British pound affecting the UK economy – a sterling crisis?

The views expressed in this article are not to be construed as personal advice. You should contact a qualified and ideally regulated adviser in order to obtain up to date personal advice with regard to your own personal circumstances. If you do not then you are acting under your own authority and deemed “execution only”. The author does not accept any liability for people acting without personalised advice, who base a decision on views expressed in this generic article. Where this article is dated then it is based on legislation as of the date. Legislation changes but articles are rarely updated, although sometimes a new article is written; so, please check for later articles or changes in legislation on official government websites, as this article should not be relied on in isolation.

This article was published on 15 August 2019

About the Author

Alexander Pearcy-Caldwell

Well-traveled and resident in two countries, Alex is working as I.T support Aisa Financial Planning and as a Investment researcher for Aisa International s.r.o. He writes about economic data and how it impacts on investment decisions.

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