Day by day, the vote for Brexit on 23 June is coming more and more to resemble Black Wednesday, the day when sterling plummeted out of the Exchange Rate Mechanism (ERM). Then, as now, the event was initially treated by many as a national calamity – before it steadily became apparent just how a big a fillip it had provided the economy. This morning’s good news is the Markit/CIPS Purchasing Managers’ Index (PMI), which surged to 53.3 in August. This more than makes up for the plunge to 48.2 in July. Anything above 50 indicates expansion in activity, and anything below 50 contraction. The month-on-month rise was the largest in 25 years.
July’s figure for manufacturing PMI was a big contributor to the Bank of England’s decision to lower interest rates and expand quantitative-easing last month. Some will still try to attribute that for the turnaround, though there is a rather more obvious elephant in the room: a fall in the pound, which began on the morning of 24 June, long before the Bank of England lowered interest rates. As became clear after Black Wednesday in 1992 there is not more powerful stimulant to the economy than a speculator-led collapse in value of the currency. A low pound makes British exports more competitive which, not unnaturally, leads to lower interest rates. Manufacturers enjoyed a similar boom when the pound sank after the 2008 banking crisis, though they then ran into difficulties from 2012 onwards when the pound strengthened.
It all raises the question: why did the pound fall so low after the Brexit vote and why, in contrast to the stock market, has it remained low? Though there was a strong rebound yesterday, sterling remains well below its level of before the referendum, while the FTSE 100 and FTSE 250 are both higher. If the prospects for the UK economy are looking a lot brighter, why isn’t sterling in greater demand? It is hard to escape the conclusion that the pound has been over-valued for some time and the Brexit vote was just the shock it required to instigate a necessary correction.