hindecapital.com / By Simon White / February 22, 2013
Sterling remains one of our least favourite currencies. We have frequently highlighted the terrible state of the UK economy, and the baleful effects the heavy private and public debt loads are having on its long-term health. This places the burden on the external sector, eg exports and earnings from overseas investments, to revitalize the UK economy. A weaker currency is the easiest and quickest way to increase the competitiveness of the external sector.
In the aftermath of the Lehman bankruptcy, the Bank of England helped engineer a 25% weakening of sterling. But this was not enough, and the current account and trade deficit have shown no signs of a sustainable pick-up.
The UK has usually had a strong services surplus, helping to offset a long-standing deficit in goods. However, the goods trade deficit has been on a long-term decline, and recently the services surplus has shown signs of rolling over. Furthermore, the income balance – the income earned on UK-owned foreign assets, which has historically been in surplus – is showing signs of a permanent lurch downwards. A recent news story about the energy company Iberdrola – domiciled in Spain, a country with its own severe economic problems – extracting a £900m dividend from UK subsidiary Scottish Power is emblematic of the problem.
This is not good for the UK. If a 25% cut in the currency – virtually all of whose effects have now passed through – was not enough to revive the external sector, it is clear another devaluation will be required. We are seeing the seeds of this now. The Bank of England minutes released on Tuesday showed a shift in outlook, with Governor King being joined by two other MPC members in a vote for a fresh injection of bond-buying money.