• Unlike previous episodes of depreciation, the declining value of the pound has not led to an improved trade balance in the UK.
• The absence of export-led growth suggests deep-rooted economic imbalances.
The UK economy has failed to take advantage of the declining value of the pound since the financial crisis to boost exports and address the country’s trade deficit, according to academics at the Sheffield Political Economy Research Institute (SPERI).
After Sterling dropped in value during the International Monetary Fund crisis in 1976, and again after Black Wednesday in 1992, there was a significant above-trend improvement in the UK’s trade balance for several years as the resulting cheaper exports attracted more overseas customers and the UK imported fewer goods from abroad.
However, the latest evidence from SPERI on the value of Sterling and the UK’s trade balance shows that although the pound fell in value by 15 per cent against the Euro throughout the financial crisis in 2008 - and 24 per cent against the US Dollar - the UK’s trade deficit was largely unchanged.
In fact, researchers say it remains stubbornly high – even though Sterling remains 16 per cent down against the Euro compared to the end of 2007, and 21 per cent down against the US Dollar.
Sterling depreciation to boost UK exports and reduce imports is one of the key aims of ‘quantitative easing’, but the study found it had not led to the expected economic boost.
The report by SPERI Research Fellow Dr Craig Berry points to the danger of the UK economy’s reliance on services exports to the Eurozone, and calls for stronger efforts to both rebalance the economy back towards highly tradable sectors such as manufacturing, and diversify the UK’s export base.
Dr Berry said: “Although the financial crisis and its aftermath represent fairly unique economic circumstances, Sterling depreciation in both 1976 and 1992 occurred amid an economic crisis, yet in both periods the trade balance improved significantly as a result.
“The persistence of a large trade deficit calls into question the benefits of quantitative easing. This policy has redistributed wealth to the most affluent sections of society, yet seemingly failed to deliver the expected export boost.
“This report adds weight to the argument that the UK has deep-rooted economic imbalances. The coalition government promised to increase UK exports, but has failed to rebalance the economy towards highly tradable sectors such as manufacturing.
“Our economy has become too reliant on financial services exports to the Eurozone. The government should look to diversify the UK export base.”
Today’s publication is the second in a new series of SPERI British Political Economy Briefs. Through this series SPERI hopes to draw upon the expertise of its academic researchers to influence the debate in the UK on sustainable economic recovery.
The Sheffield Political Economy Research Institute (SPERI) is an academic institute based at the University of Sheffield. The institute aims to bring together leading international researchers, policy-makers, journalists and opinion formers to develop new ways of thinking about the economic and political challenges posed for the whole world by the current combination of financial crisis, shifting economic power and environmental threat.
The analysis is based on exchange rate and trade data compiled by, respectively, the Bank of England and the Office for National Statistics. The data shows that:
• In 1976, Sterling fell by 25 per cent against the Deutschemark and 19.2 per cent against the US Dollar. In the following two years, the UK trade balance improved by an annual average of 161 per cent, followed by 153 per cent for the subsequent two years.
• These changes in the trade balance represented a significant improvement on the trend evident in the four years prior to depreciation.
• In 1992, Sterling fell by 15.3 per cent against the Deutschemark and 10.9 per cent against the US Dollar. In the following two years, the UK trade balance improved by an annual average of 162 per cent, followed by 96 per cent for the subsequent two years.
• Again, these changes in the trade balance represented a significant improvement on the trend evident in the four years prior to depreciation.
• In 2008, Sterling fell by 15.4 per cent against the Euro and 24.4 per cent against the US Dollar. However, the UK trade balance deteriorated by an annual average of 6 per cent in the following two years, followed by 8 per cent deterioration for the subsequent two years.
• At the end of 2013, Sterling was still 15.8 per cent down against the Euro and 20.9 per cent down against the US Dollar, compared to its value at the end of 2007. Yet the UK still carries a trade deficit of almost £30 billion.
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