Bill Jamieson: Don’t blame Brexit concerns for all our currency woes

The pound has weakened in recent months  down against the US dollar by some 10 per cent since the autumn and against the euro by some 12.7 per cent. Picture: Getty Images

The pound has weakened in recent months  down against the US dollar by some 10 per cent since the autumn and against the euro by some 12.7 per cent. Picture: Getty Images

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From the International Monetary Fund and the Bank of England have come grim warnings were the UK to vote to leave the European Union on 23 June. And in case you missed these, the CBI chimed in with another stern reminder of its forebodings over Brexit.

Chief among all these concerns is that the prospect of Brexit has already weakened the pound – and the currency would take a substantial further hit on a “Leave” vote.

How much credence should we give these warnings? How clear and unambiguous is the linkage between Brexit concerns and the effect on sterling? Has the pound already been weakened by the Brexit campaign? And would a vote to leave have the adverse economic effects so boldly forecast?

According to the International Monetary Fund, the UK’s exit from the EU could cause “severe regional and global damage”. It would disrupt established trading relationships and cause “major challenges” for both the UK and the rest of Europe. The referendum had already created uncertainty for investors and a vote to exit would only heighten this.

The IMF now expects 1.9 per cent growth in the UK this year, compared with its January estimate of 2.2 per cent.

Days later, the Bank of England warned the referendum could hurt growth in the first half of this year. It said sterling had also been affected by uncertainty and that “there are some signs that uncertainty has begun to weigh on certain areas of activity” as investment decisions are postponed.

The bank also said sterling had fallen further over the past month, mostly due to uncertainty ahead of the EU referendum, echoing remarks by bank governor Mark Carney last month that the possibility of Britain leaving the EU was the “biggest domestic risk to financial stability”.

Not to be outdone, the CBI has warned that a UK exit from the EU would cause a “serious economic shock”. It said a study it commissioned from accountancy giant PwC found that a vote to leave would have “negative echoes” lasting many years – as much as 5 per cent lost from GDP and 950,000 jobs by 2020. So precise!

Now, we may dismiss this chorus of warnings as simply “Project Fear”. But there are real and serious concerns from respected sources – notwithstanding the IMF’s flaky forecasting record of late. And few would doubt that a vote to leave would cause uncertainty over the currency, UK-EU trade and inward investment.

But how much sterling and economic weakness? And for how long? An unarguable truth about currency movements is that they are multiple in causation, variable in effect – and beyond accurate prediction. The movement of currencies can be as capricious and uncertain as the movements of the sea. Brave are the economists who would venture a confident prediction without heavy qualification.

Yes, the pound has weakened in recent months – down against the US dollar by some 10 per cent since the autumn to $1.42, and against the euro by some 12.7 per cent to ¤1.257. But factors other than referendum uncertainty may have had greater influence.

For more than 18 months the pace of UK growth has been slowing amid persistent concerns over an unbalanced economy, and forecasts point to little by way of recovery in the period ahead. Indeed, the data so far available for the first three months of 2016 suggest that growth is slowing. Estimates from the National Institute for Economic and Social Research indicate that GDP rose by only 0.3 per cent over the quarter.

Industrial production (including manufacturing) and construction are still below their 2008 Q1 levels and labour productivity (output per hour) disappointingly fell 1.2 per cent in the final quarter of last year. Caused by Brexit fears? Really?

Then there is the UK’s billowing deficit. The current account deficit of £32.7 billion (7 per cent of GDP) in the fourth quarter of last year was the largest quarterly deficit on record since records began in 1955. And for 2015 as a whole the current account deficit was the largest annual deficit since annual records began in 1948.

And within all this, figures for the three months to February showed the largest trade deficit with the EU on record, hitting £23.8bn. It has little to do with Brexit. We can live in this fool’s paradise only for so long before the currency weakens.

Sterling’s greater percentage weakness against the euro may also reflect further European Central Bank commitment to quantitative easing and the further move to negative interest rates, both working to lower the currency.

So there are factors playing on the UK exchange rate other than referendum outcome uncertainties, and indeed, they may be exercising a stronger influence. Blaming the pound’s fall on Brexit concerns is blind to these dynamics and is overly simplistic.

The same could be said of those warnings of dire consequences should voters opt to leave the EU – that trade and inward investment would plunge or, in the case of Labour leader Jeremy Corbyn, that there could be a “bonfire” of workers’ rights if the UK votes to leave the EU in June and that the Conservatives would “dump” equal pay, annual leave and maternity pay rights.

But these are assertions, not facts: the truth is that no-one knows with any certainty what the consequences might be. This does not remove concerns over uncertainty but it would be equally fair to assert that the rest of the EU would seek to safeguard existing trade relations with the UK; that foreign direct investment is primarily attracted by the availability of skills and good transport infrastructure; and that no UK government would risk voter wrath over curtailment of employment rights.

The danger is that in this echo chamber of dire warnings there is a negative feedback effect on business confidence. Such forecasts need to be treated with a measured circumspection.

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