Bill Jamieson: Spare your tears for tourists in Tenerife

Exchange rates can have a pivotal effect on a nation's economy. Picture: Dominic Lipinski/PA

The pound is now some 19 per cent weaker against the dollar than it was just ahead of the referendum result in June 2016, and is now trading at 28-month lows against both the dollar and euro

For holidaymakers, the problem is that tourist rates are even weaker – with the euro widely near parity with sterling. The pound is currently trading at 28-month lows against both the dollar and euro. A weaker pound also means higher imported manufactures and raw material costs. But the focus of most media attention in the past week has understandably been on the immediate hit to holidaymakers.

Yet there is another side to all of this that may help staunch the flow of tears on the beaches of Tenerife. For all that we may curse the vagaries of a floating pound – up one week, down the next – it is this very flexibility that has helped the UK and Scottish economies out of some tough spots. A sharp fall in sterling in the wake of Black Wednesday in 1992 helped to usher in a sustained economic pick-up. The same was true in the wake of the 2007-2009 financial crash.

Indeed, it is fair to argue, as the Guardian’s economics guru Larry Elliott has done, that the currency movement causing the most damage was the rise in the pound in the late 1990s and early 2000s “that hollowed out a large chunk of manufacturing, costing one million jobs”.

Do we always wring our hands at currency depreciation? Not when it came to giving advice to Greece during its financial crisis when there was barely an economist in the land that did not bemoan the country’s entrapment in the euro and inability to devalue to help its economy recover from a major slump.

The alter ego of a sterling depreciation is the cheaper cost of UK exports in overseas markets. A lower pound gifts us a competitive edge – all the more welcome when we are running a balance of payments deficit equivalent to five per cent of GDP. At the same time it enhances the value of UK company earnings abroad.

This is one of the reasons why on the UK stock market, the FTSE100 has not slumped as many feared in the wake of the 2016 referendum result, but is up by a third on its pre-2016 referendum vote low and has gained more than 12 per cent since the start of the year alone.

Here in Scotland, the benefits of a lower exchange rate are not to be sneezed at. We exported goods and services to non-EU overseas markets worth some £17.5 billion in 2017. International food and drink exports totalled £5.9bn, petroleum and chemical products £3.5bn and professional, scientific and technical items £3.7bn. Our major exports include Scotch whisky, salmon, beef and lamb, chemicals, petroleum products, electronics and textiles.

There is also a boost to Scotland’s attractiveness as an international visitor destination. Our tourist sector employs 207,000 and is reckoned to be worth some £30.9bn to our economy. A lower exchange rate should work to enhance the number of overseas visitors – and their holiday spending while they stay here.

This should work in due course to boost hotel occupancy rates and the takings of cafés, bars and restaurants across the country. Not everyone in the capital may welcome the prospect of yet more overseas tourists in the peak summer months, but much can be done to encourage visitors to other towns and cities – and to the central and western Highlands in particular.

However, the main factor behind the latest downturn in sterling is the belief among international investors that a no-deal Brexit would be bad for the UK economy.

The bets being placed on the currency markets suggest prospects for UK plc are not good – a belief strengthened further last week by remarks by Bank of England governor Mark Carney that a no-deal Brexit would result in an instant shock to the UK economy.

Items such as petrol and food, he warned, would become more expensive if the UK leaves the EU without an agreement. The Bank has also lowered its growth forecasts for the UK, predicting no growth in the third quarter and just 1.3 per cent growth for the year against a previous projection of 1.5 per cent – and that’s assuming the UK leaves the EU with a deal.

There is scarcely more cheer in the latest forecasts from the EY Item Club Scotland.

The Scottish economy, it warns, faces slow growth this year, even without a “no-deal Brexit”, and will improve only slightly in the following years, due to the slowdown of migration into Scotland.

But it says forecast growth in output of only one per cent this year compared with 1.3 per cent in 2018 would be better than the risk of a “no-deal Brexit”.

That would mean an “immediate, real and adverse” impact on exports, and probably on the prices and availability of imports. On items such as food, that would squeeze household incomes.

The possibility that a weaker pound could make British-made goods and services more competitive is not seen as a balance to the harm done, particularly if British exports face new tariff barriers. “Business and possibly consumer confidence would remain weak”, it says, “with the former adversely affecting investment, and both damaging sales. The consequence would be slower productivity growth, with the danger that this locks the UK and hence Scotland, into a slow-growth trajectory over the medium to long term.”

But there are problems more deep-seated here than Brexit when taking a longer period for comparison. If tears are to be shed, spare the grief over Tenerife. Scotland’s growth has been below one per cent in six of the past 10 years, and has averaged a very poor 0.7 per cent during that time. That is a huge challenge for the Holyrood administration and requires a long-term and far-reaching switch to spending on infrastructure and productivity improvement.