Dollars and Sense: The Sterling Depreciation and UK Price Competitiveness (Vox EU, 4 min read)

(You can read the article by clicking here)

The large depreciation of the sterling by 12% following the Brexit referendum of 2016 yet to revert. This article discusses research from Giancarlo Corsetti, a Professor of Macroeconomics at Cambridge, which looks at why the large sterling depreciation failed to boost UK exports. Findings show that the currency in which UK firms invoice their exports matters a lot. Exchange rate pass through is high when firms invoice in sterling and low otherwise. Nearly two-thirds of UK’s trade with the EU is conducted in GBP. Mark-ups and price adjustments are high than invoices are in the destination currency. This evidence makes the puzzle even harder to resolve.

Why does this matter? A weak sterling is generally not to fear – it has been on a downward overall trend since the 1980s and is largely a reflection of a higher inflation than, say, the US. However, the specific cause of the weakness recently (Brexit uncertainty) might be why it isn’t helping exports. It may perhaps be that this uncertainty (Hard or Soft Brexit) have prompted exporters to wait before investing or increasing production capacity. Hence volumetric growth in exports might have stagnated. 

(The commentary contained in the above article does not constitute an offer or a solicitation, or a recommendation to implement or liquidate an investment or to carry out any other transaction. It should not be used as a basis for any investment decision or other decision. Any investment decision should be based on appropriate professional advice specific to your needs.)

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