How much should we worry about a falling pound? Since Monday sterling is off 5 percent against the Euro, 6.5 percent against the dollar, 9 percent against the Yen and 3.4 percent against the Hungarian forint: Hungary, of course, had to be bailed out by the IMF. This is worrying for the government as its survival plan for the next five years involves borrowing untold billions from the Arabs, Chinese or whoever has cash – who may not relish the thought of pumping billions into IOU notes in our rapidly devaluing currency. Of course it’s true that a weaker currency is good for the economy overall, as will help exports. It’s a reminder how lucky we are not to be in the Euro. But talk about a manufacturing-led recovery next year is dangerously optimistic. Here’s three reasons why.
1) We don’t have much of a manufacturing base left. While the City was allowed to boom in a light-touch regulation, manufacturers have been hit by a torrent of ‘elf-n-safety legislation. Our trade deficit is just appalling: Britain doesn’t make enough stuff to flog. That’s why the VAT cut is such a blunt tool. If it has any effect at all, it will mean more goods bought from China thereby helping its economy.
2) Globalisation remains a major threat to UK manufacturing, a risk factor that wasn’t there in the 1990s. Even if the pound goes the same way as the Icelandic kroner, this globalisation effect won’t be reversed. David Cameron is unrealistic, in my view, to talk about a resurgence of manufacturing. The best we can hope for is to abate the decline.
3) Manufacturing will get a hell of a lot worse before it gets better. They’re not jumping around the factories, punching the at the plunging pound. They have other more urgent issues to deal with. Orders have collapsed – far more sharply than in the last recession. The Manufacturing PMI, a survey asking manufacturers how their business is, tells the full horror story and it spells a future of layoffs and contraction.
Sure, in theory, the falling pound helps British manufacturers. But we need a manufacturing base to be helped, and that depends on a banking system that won’t bankrupt them by calling in loans – and an order book full enough to get through the next six months. Look at the PMI indicators for new orders below. This is the true story of British manufacturing now. If this is our lifeboat, then we really are sinking.
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