December 23rd 2008
Lower Pound a Mixed Blessing
The British Pound has fallen so sharply in 2008 that parity with the Euro isn't that far-fetched. The problem is that the UK economy now closely mirrors that of the US, minus the perceived "safe haven" aspects. In fact, the UK now has a twin deficits problem of its own, with a trade imbalance that exceeds 4% of GDP and government spending set to rise in response to the credit crisis. Meanwhile, UK interest rates have already been reduced drastically, and could fall all the way to zero, again mirroring the US. The combination of cheap money and higher imports is raising the specter of inflation, and frightening away foreign investors. Under ordinary circumstances, a cheaper Pound could be an effective remedy for recession, but when the entire global economy is reeling, it probably can't accomplish much. The Telegraph reports:
Even though sterling has fallen, exports orders remain weak. Competitive devaluations rarely work. But they have no chance of when the rest of the world is slowing too.