Thursday, November 20, 2008

Is Falling Pound A Curse To British Economy?

Perhaps not,

(1) Fair valuation. IMF estimates that the fair value for pound is $1.50 to £1.The previous $2 to £1 shows that pound was overvalued against the dollar. Therefore the current devaluation is not more than a market correction (just like correction of share prices)

(2) Improve competitiveness. As pound falls against the dollar, Americans will find it cheap to buy more from UK. Export will increase. But for Britons, falling pound indicates falling purchasing power. Therefore they will import less. Depending on how long & how much pound devaluate, this may be able to revive UK manufacturing sector which is in deep recession. Also it may help to absorb some of those previously retrenched workers. Unemployment may be reduced

(3) Economic growth. Falling pound will cause demand for UK goods to increase. Therefore exports will increase. At same time, falling purchasing power means Britons will spend lesser on imported goods. Overall will be an increase in net exports (X-M). This will cause AD to increase, thus lifting the British economy

(4) Other countries are doing badly too. As UK is inevitably running into a recession, Monetary Policy Committee (MPC) will be forced to slash interest rates. People may begin to think that now it is no longer attractive to hold pound. But never forget, UK’s rival such as US is doing much worse. Japan had announced another recession recently. Germany is not spared too. In short all major economies are faring badly. Holding dollar or Euro or yen could be as good as holding pound. Interestingly, among these major economies, UK’s national debt as a % of GDP is among the lowest

Don't believe? Check this out . Although not the latest, but it's value hasn't changed much

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