Ed Conway, Sky News’s economics editor, tweets this morning that sterling has notched up a dubious record – it stands out as the worst-performer of all major currencies over the past 24 hours, month, three months and 12 months. But does that matter? Yes, if you are about to go on a foreign holiday. Take a longer view, however, and you might conclude that a weak pound might be rather a good thing.
The most obvious point about a sinking currency is that it makes the country’s exports cheaper in global markets and makes imports more expensive. It thus helps to boost production while simultaneously helping to switch consumers towards home-produced goods. Living standards might fall in the short term, as foreign holidays and imported goods become more expensive, but in the longer run it should help to boost the economy.
Yet there is another reason to welcome a fall in sterling. Look at the chart of the exchange rate between sterling and the dollar over the past half century and two things are clear.
Firstly, that there has been a long, downwards drift of sterling over time. This does not mean that Britons have become relatively poor compared with Americans – it is more a reflection that Britain tends to have a higher inflation rate. Over time, sterling has adjusted downwards against the dollar because it is depreciating relative to the value of goods, services, salaries and assets in Britain at a faster rate than the dollar is depreciating relative to the value of goods, services, salaries and assets in the US. Since the 1990s, inflation in Britain has been more in line with that in the US and as a result the long-term decline in sterling relative to the dollar has flattened out.
The second observation is more subtle. Imprinted on the long-term downwards curve in the value of sterling is pattern of peaks and troughs.
Look at where the peaks occur and the troughs occur and they tell an interesting story. The peaks occurred in March 1975, October 1980, January 1991 and December 2007. There were flatter and less significant peaks in September 1998 and June 2014. The troughs, on the other hand, occurred in November 1976, March 1985, February 1993, June 2001 and February 2009.
What do these dates have in common? The peaks have tended to occur shortly before recessions – and the troughs shortly before economic booms, or at least periods where the economy recovered.
Given that many of these booms and recessions were global – experienced in the US as well as Britain – it is not immediately obvious why peaks in sterling’s value should be indicators of bad economic times and troughs an indicator of better times. But there is certainly a pattern there. If it persists we can expect strong economic growth over the next couple of years.