UK: Deloitte Monday Briefing: The Pound Makes A Comeback

Last Updated: 12 March 2014
Article by Ian Stewart

Most Read Contributor in UK, August 2017

A personal take on economics from Ian Stewart, Deloitte's Chief Economist in the UK.

  • One of the most visible manifestations of Britain's recovery is the strengthening of the pound. On a trade-weighted basis, against a broad basket of currencies, the pound has risen 9.3% in the last year and now stands at its highest level since November 2008.
  • Much of the pound's rise reflects strong gains against the dollar, up by 11% in the last year, and the Japanese yen, where sterling has risen by 22%. Sterling has also made significant gains against a number of emerging market currencies in the last year, including the Brazilian real, the Indian rupee, the Hungarian forint and the South African rand. But against the UK's largest trading partner, the euro area, sterling's rise has been more modest, increasing by just over 4% in the last year.
  • Recent sterling strength only partially unwinds the huge, 26% devaluation that occurred between 2007 and 2009 as the recession took hold.
  • Trying to explain what drives big currency moves, even months after the event, can be tricky. In the case of the yen the real story is not sterling strength, but a broad based devaluation in the yen caused by the pro-growth, pro-inflation policies of Prime Minister Shinzo Abe. Equally, sterling's rise against a number of emerging market currencies is part of a wider sell off in emerging currencies triggered by fears of slowing growth.
  • At home perhaps the most plausible explanation for recent sterling strength is that it mirrors an unexpectedly strong recovery in the UK economy and in UK interest rate expectations. Sterling's rise has coincided with a run of substantial upgrades to growth forecasts for the UK economy.
  • The Economist's Big Mac index is probably the best known estimate of "fair value" for currencies. It calculates the notional exchange rate against the dollar required to equalise the price of a Big Mac in the US and other countries. On this basis sterling has gone from being 14% overvalued against the dollar in 2007, when the pound bought more than two dollars, to being roughly in line with fair value.
  • The IMF takes a less rosy view. It estimates that, on a purchasing power parity basis, sterling is 14% overvalued against the dollar. And while forecasts for currencies should be treated with caution, it is interesting that on average economists see the pound weakening somewhat against the dollar in the next two years.
  • But, assuming a stronger pound is here to stay, what does it mean for the economy?
  • A stronger pound will dampen inflation pressures just as the big devaluation of 2007/09 fuelled a surge in import prices and in inflation. Recent lower UK inflation numbers partly reflect a more benign trend in import prices. By putting downward pressure on inflation a stronger pound helps give UK consumers a much-needed boost to their spending power at home and abroad.
  • By the same token sterling strength reduces the spending power of overseas buyers of UK products and assets. A strong pound is a headwind for those reliant on overseas demand, be they exporters or those selling assets such as UK shares or property.
  • Yet numerous other factors influence demand for UK goods and assets. If currency weakness were a panacea for export success then the US, whose currency has lost almost half of its value in the last 30 years, ought to be running a huge trade surplus. The sharp decline in the pound at the time of the credit crunch has not ignited a UK export boom partly.
  • Conversely the export success of Germany and Switzerland over many decades has been accompanied by appreciating currencies.
  • The UK economy should be able to cope with a rather stronger pound, particularly if it is accompanied by a global recovery. For UK business the message is that a period of extreme sterling weakness is probably over.


UK's FTSE 100 ended the week up 0.1%.

Here are some recent news stories that caught our eye as reflecting key economic themes:


  • The net worth of American households rose to a record high in 2013, boosted by soaring stock prices and rising home values
  • British shop prices fell by 1.4% in February, the biggest fall since British Retail Consortium data began in late 2006
  • New Zealand export volumes reached a record in the Q4 2013, driven by surging dairy exports to China
  • New job vacancies in the City of London rose by 25% in February compared to a year ago, according to specialist recruiter Astbury Marsden
  • 'Skills shortage vacancies' – where businesses cannot find recruits with the right skills – are growing twice as fast as vacancies overall in England, with the manufacturing sector faring worst
  • Residents of Copenhagen won a legal battle to prove that freedom from noise pollution is a human right, potentially delaying major construction projects
  • The majority of Britons now expect an interest rate rise in the next 12 months, according to the Bank of England's inflation attitudes survey
  • China experienced its first corporate bond default in recent history, when a Shanghai-based solar company failed to pay out interest on a security it had sold
  • The Chinese government kept its annual growth target at 7.5%, despite analyst predictions that the National People's Congress would lower it
  • The Financial Times reports that the automotive industry is pondering how motor insurance will work in the event of crashes or malfunctions where driverless cars are involved
  • Japanese salaries increased for the first time in nearly 2 years in January, with base pay rising by 0.1% compared to a year earlier
  • American oil refiners are set to add the equivalent of a new large-scale refinery a day to existing plants between now and 2018, according to information compiled by The Wall Street Journal and IHS
  • Ferrari is to cap production of its luxury cars in 2014, in a bid to maintain the brand's exclusivity and sell a more expensive mix of cars
  • British supermarket Waitrose announced a series of "very British" in-store initiatives, such as wine-tasting and dry cleaning, to counter the rise of the German discount supermarkets Aldi and Lidl
  • French truffle farmers have launched a campaign to help consumers appreciate the expensive black Périgourd truffles and distinguish them from cheap Chinese truffles they say are sprayed with fake scent by crooked chefs – fungi business.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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