Since Article 50 was triggered last week, City traders have been avidly watching the fluctuations of the pound. Analysts at Barclays, Nomura and Citigroup think sterling is undervalued against the euro and the dollar, and due for a rebound, having dived in the market tizzy that followed last June’s referendum and kept its head down through the phoney war of the past nine months. As ambiguity over Brexit terms begins to recede, says the City, it’s time for the pound to perk up.
Well, maybe — as I’m often moved to observe in relation to bald economic statements. Let’s take a closer look. The sudden fall last summer boosted UK exports and tourism, but was by no means the only factor that kept the economy buoyant after the Brexit shock: consumers shrugged off fear and returned to spending as though nothing had changed, encouraging employers to go on investing and creating jobs. But the effect of the cheap pound on import prices is also the prime cause of a jump in inflation to 2.3 per cent, squeezing household incomes (see below) and carrying the political peril of hurting those on low incomes the most.
Latest data for manufacturing and exports shows growth still positive but slowing, which argues for keeping a competitive pound even if it causes domestic pain. A rise from 1.17 to 1.30 against the euro and from 1.25 to 1.40 against the dollar would knock exports and dent growth but douse inflation. It could happen of its own accord if that’s the way markets bet, but it’s much more likely to happen if the Bank of England finally starts to raise interest rates, a move many pundits feel is overdue. It’s a tough choice, but that’s the way I’d go.
Let’s start saving again
The savings ratio — the portion of household incomes left over after all forms of current spending — had fallen by the end of last year to 3.3 per cent, its lowest level since records began 60 years ago, having declined in every quarter but two since the spring of 2014, when it stood above 7 per cent. Underlying this trend, says the Office for National Statistics, is ‘strong growth in consumer spending… on the back of robust labour market activity’ combined with weaker wage growth, the rise in inflation mentioned above, and lately ‘a fall in investment income from property’, meaning bad news for buy-to-letters. The spending surge is being fuelled by credit-card debt and all those financing deals that make new cars and three-piece suites irresistible.
These are the flashing lights on the dashboard of the UK economy as it bowls along the Brexit highway, with growth of 1.8 per cent last year and an official forecast of 2 per cent for this year. But like Uber’s ill-fated driverless car, there’s bound to be a prang before long. Besides the all too familiar income-squeeze-debt-surge pattern, what policymakers are failing to address is the more fundamental destruction of the savings culture that has followed the financial crisis.
Almost a decade of ultra-low interest rates, combined with loss of trust in financial institutions after so many mis-selling scandals, makes most of us reluctant to buy savings products. Putting money aside for a mortgage deposit makes little sense to youngsters whose only real hope of becoming first-time buyers is to visit the bank of mum and dad. Conversely, home ownership is seen as the most reliable store of wealth: many plan to fund retirement through equity release from their houses, rather than striving to save, at miserable rates of return, out of current income.
A low savings ratio is bad for long-term investment in the productive economy. Britons need persuading to save again. Again, a rise in interest rates would be a helpful signal. And as the new tax year begins, taking up increased tax-free Isa allowances, including the new Lifetime Isa deal, would be a good first step to rediscovering the saving habit. You’d be foolish not to, and you’ll be doing the nation a favour.
Greater Gibraltar
Two of the top tips in Donald Trump’s The Art of the Deal, of which I wrote last week even though he allegedly didn’t write it himself, are ‘Think Big’ and ‘Maximise the Options’, also expressed as ‘I keep a lot of balls in the air’. How should Theresa May apply that advice in response to Spain’s opportunistic bid to raise the issue of sovereignty over Gibraltar as a potential Brexit hurdle?
She could, of course, offer a repeat of the 2002 referendum in which Gibraltarians voted 99 per cent ‘No’ when asked whether Britain and Spain should share the Rock’s sovereignty. But the ‘balls in the air’ gambit I have in mind for her is bolder than that. Why not offer a referendum on the condition that — if sovereignty is to be regarded as negotiable, regardless of historic borders and treaties — the vote is extended to the 260,000 citizens of the neighbouring Spanish district of Campo de Gibraltar (including the towns of Algeciras and La Linea) as well as the 20,000 voters of Gibraltar itself?
A rather provocative 2015 ‘Economic Impact Study’ by the Gibraltar Chamber of Commerce points out that while employment in the Campo area itself fell by 20 per cent between 2007 and 2015, around 10,000 ‘frontier workers’ continued to cross into Gibraltar every day — and the overall contribution of Gibraltar to the output of the Campo is worth around half a billion pounds a year. It follows that any impediment to cross-border relations as a result of a hard Brexit would hurt Spanish neighbours who are already struggling to make a living — and who if sufficiently disenchanted with their current rulers in far-away Madrid, might well decide to throw in their lot with the low-tax, high-growth, free-trading British territory next door.
So never mind sending a gunboat, Prime Minister — just launch a campaign for Greater Gibraltar, and we’ll rally Spectator support. That should stop Spanish foreign minister Alfonso Dastis in his tracks.
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