Magazine

The Wonderful Falling Pound


Britain's hard-pressed manufacturers love a falling pound. So they have warmly welcomed the 11% slide in sterling's exchange rate against the euro over the past year. "It may be bad news for holiday makers, but the benefits to business could be huge," says Annette Fitzgerald, policy manager of the Chamber of Commerce in Birmingham.

As the pound weakens against the euro, it makes British goods more competitive on the Continent, which is by far their largest export market. And it boosts corporate profits when earnings from the euro zone are converted into sterling. Manufacturers are already seeing positive results. In April, new orders jumped to their highest level in four months. The share prices of leading exporters, such as defense contractor BAE Systems and Burberry Group, have risen as a result. Carmakers with British operations, such as Nissan Motor Co. and Ford Motor Co., say they expect first-quarter earnings to benefit from the pound's fall against the euro. So do service companies such as Barclays, the bank, and communications group WPP. "Sterling's fall has been great for all exporters," says Peter Matthews, managing director of Black Country Metals outside Birmingham. "We've been up against fierce competition for years because of the strong pound. Now things are much better."

British industry is benefiting on a second front, too. Although sterling has fallen against the euro, it has risen 8% against the dollar since last May. That means that oil and commodity imports, which are mostly priced in greenbacks, now cost less. "Manufacturers get a double benefit -- lower costs and improved competitiveness," says David Coleman, an economist at London's Confederation of British Industry. Whether an assist from the pound will be enough to push up growth of 2003 gross domestic product to the 2% to 2.5% level forecast last month by Chancellor Gordon Brown remains to be seen. The British economy grew by just 1.6% last year, the lowest level since 1992.

Nor will a weaker pound make it easier for Prime Minister Tony Blair to move Britain to the euro. Economists say the current exchange rate of around 1.4 euros to the pound is about the right price at which sterling should convert to the euro. But most add that British and Continental economies have not converged sufficiently to allow entry just yet. "Yes, the exchange rate is where it should be, but the Continental economy is only growing half as quickly as ours," says a government official. The pound isn't going away anytime soon -- and so long as it keeps falling against the euro, plenty of manufacturers will be relieved. By David Fairlamb in London


Best LBO Ever
LIMITED-TIME OFFER SUBSCRIBE NOW
 
blog comments powered by Disqus