The fall in the value of the pound over the past week has sparked an over-reaction, says Bill Jamieson
Few comedy catchphrases have more hit a national stereotype on the head than the “Don’t panic!” admonitions of Corporal Jones in Dad’s Army. It is a line delivered at full cry with flailing arms, trembling legs and running round in circles.
Over the past week ‘Corporal Jones’ has come to characterise large sections of the political class and commentariat as the pound has fallen further. Earlier this week its depreciation against the dollar since the Brexit vote touched 19 per cent.
Cue a national panic attack. Does this not deal our economy a deadly blow? A blast of inflation will surely follow, businesses will retrench, foreign investment dry up and our economy will be pushed further towards recession.
Sterling rallied a little yesterday but may well fall further, almost certain to amplify the forebodings of economic gloom.
Beware this Greek chorus. Of all the dire fates likely to befall us, the fall in the pound will not be the cause of them. It is, in fact, the best opportunity that has opened for business in years. It makes our goods and services immediately more competitive in world markets. It makes investment here more, not less attractive. For Scotland’s manufacturers, our food and drinks sector and for Scotland’s tourism and hospitality industry, it offers the best prospects for years of a business resurgence.
Over the past few years I have run out of fingers and toes to count the number of Scottish government initiatives, drives and strategies to boost export activity – particularly among companies that have not previously looked to overseas markets. They have had little effect. But a marked devaluation is likely to prove more efficacious than any number of “export tsars”.
And one thing’s for sure: we couldn’t go on as we were. The UK’s current account deficit hit £28.7 billion in the second quarter, equivalent to 5.4 per cent of GDP, the largest such deficit as a percentage of GDP among the Group of Seven major industrial economies.
Little wonder, looking at the eye-watering £100 billion deficit run up in 2015 that MPC member Michael Saunders warned the Treasury Select Committee this week that he would not be surprised if sterling has further to fall. Who were we trying to kid in our expressions of shock that reality has at last caught up with our exchange rate?
The big concern, of course, is that it will lead directly to an upward spike in inflation. Goods, services and raw materials purchased from abroad become that much more expensive, forcing up the costs of goods manufactured here.
Let’s set aside for a moment that the principal preoccupation of monetary policy for the past two years has been the spectre of falling prices – deflation - and that successive bouts of Quantitative Easing by the Bank of England were designed inter alia, to lift the inflation rate from near zero nearer to the Bank’s targeted rate of two per cent (inflation is still running at just 0.6 per cent).
So while a pick-up in inflation looks likely, the Bank may be sanguine over a return to a two per cent rate. However, inflation is, after all, one of the most difficult economic elements to control. Is it not likely that there will be a fierce resurgence given the scale and suddenness of the recent exchange rate fall – one that will sweep inflation back to five per cent and more?
Historical precedent suggests that this is by no means immediate or certain. Similar deep anxieties surrounded our exit from the European Exchange Rate Mechanism in September 1992. I remember covering this chaotic episode and the months of lugubrious warnings that preceded it: the grim predictions from the CBI and large sections of the government back benches that any failure of the UK to maintain a clearly over-valued exchange rate would condemn the economy to perdition.
But what happened? Inflation did not surge upwards. It fell to just 1.9 per cent the following year and remained subdued for most of the subsequent ten year period.
As for our economic performance, our growth rate sprang from just 0.1 per cent in 1992 to 2.2 per cent the following year and to 4.3 per cent in 1994.
In fact, the period from 1992 to 1997 came to be hailed by former Bank of England governor Mervyn King as “The Great Moderation” – the longest period of unbroken economic growth on record. It did nothing, of course, to restore the political fortunes of the Conservative government which had taken us into the ERM and insisted to the last on the benefits of membership. Sleaze, complacency and an administration that had run out of ideas - saving, famously, the “Road Cones Hotline” - paved the way for the sweeping victory of Tony Blair and New Labour in 1997.
But of a bumpy ride ahead this time around, I have little doubt given Brexit uncertainties, even though as matters stand, our economic position is not as bad as initially feared in the immediate wake of the Brexit vote. UK growth for the second quarter has been revised up to 0.7 per cent quarter-on-quarter. Services grew 0.4 per cent month-on month in July and the Markit/CIPS surveys for manufacturing, construction and services strengthened further last month.
The construction Purchasing Managers Index (PMI) for September released last week showed activity expanding for the first time since May and at the fastest rate since March. Housebuilding activity has returned to growth after three months of contraction and expanding at the fastest rate since January. Civil engineering also returned to growth with a six-month high.
For Scotland the picture is altogether more problematic – and it has little to do with Brexit or the falling pound. Scottish government figures for the second quarter released yesterday showed growth 0.4 per cent, and just 0.7 per cent over the last year – lagging the UK which registered growth over the same periods of 0.7 per cent and 2.2 per cent respectively. This lacklustre showing is largely due to the underperformance of the services sector. “Prospects are poor,” is the summation of economist John McLaren, “with GDP growth likely to be around or under one per cent for the year overall.”
The Scottish Government has repeatedly stated that “the foundations of the Scottish economy are strong”. But as McLaren comments: “Given the importance of the services sector to the economy as a whole, this statement seems complacent, or just wrong.” Indeed, the one chink of light in the outlook is largely due to the pound’s fall: “A devaluation related boost to tourism and exports,” he adds, “are the main hope for a pickup in growth in the second half of the year.”
We have much to worry about in Scotland’s economic performance – but the fall in the pound is not one of them. ‘Panic Ye Not’ as another comic once advised. The ‘Corporal Jones’ political class should pull itself together.