Sunday, 21 March 2010

Learning to live with a weak Pound

Following Sterling’s relative strength against the Euro during 2005-2006, where it sat in the mid €1.40’s, the year 2007 saw almost 10% wiped from the relative value of our pound and 2008 a further 30%. This is all very humiliating and has made the European holiday a very much more costly affair than ever it used to be, of that there is no doubt.

Typically though, a weakened currency has always been seen as a bit of a helping hand to an economy suffering contraction or recession. Periods of slow-down can be eased by the increased trade that comes as your goods and services are more competitive abroad. Quite simply, £10 worth of trade to us used to sell for around €14 on the continent, where now, thanks to our devaluation it would cost more like €11, creating the hope that it is more likely to sell and in stronger numbers. Of course where this idea falls down is that if your major export markets are also feeling the pinch in terms of unemployment and ‘feel-bad factor’, then cheap though your goods may be, they are less likely to find the numbers of willing buyers that you so desperately need.

One positive factor that is often overlooked in relation to a weak Pound is the high number of UK-listed companies that are truly multi-nationals. BP would be the obvious example of this. BP sits atop the FTSE-100 and is clearly regarded as a British company. However, it realises more than 90% of its income in dollars. These dollars are bigger, fatter and more significant than they used to be when compared to BP’s native currency. This has the effect that though the home market looks very flat indeed, this helps to keep staff costs and perhaps taxation down in the short term, while the weaker currency actually has the effect of inflating earnings in Sterling terms. This is a very powerful phenomenon and is in no way confined to BP. It can only help the already healthy dividend yield on the FTSE and help support share prices.

Where we do need a certain amount of re-education is in what this weak currency signals. We appear to be embarking on a period where we have a weak economy, are less competitive and have poorer prospects. It is this and our potentially crippling levels of debt that is driving down our currency.

The political debate centres on who will cut what and when they might start and for all their efforts to show clear differences, our politicians are not giving us or wider markets a clear enough message. I begin to feel that it is not so much a question of how big a cut you promise as how believable you are about the time-frames and your will to get on with it. What makes us weak on the world stage is that we have built up this enormous burden of debt systematically over a number of years and yet have not been prepared to state for the record a coherent and credible plan to begin its reduction.

So long as our leaders give these mixed messages on a world stage then we must become used to being a weaker force internationally and with that the weaker currency that goes along with it.

Anyone for Devon this year?