Can you Hear the Pound Drop?
This is the first in a regular Bella column on matters economic. The big news this week was the noise of the pound sterling hitting the floor. Crash, bang, wallop! Sterling dropped to its lowest level against both the euro and the dollar in the past year. George Kerevan reports.
The key thing to note is that the foreign exchange markets don’t work on political sentiment but on making money. The pound took a nosedive because the markets have decided a hard Brexit is more likely than not, and that said hard Brexit is bad business.
The other thing to keep in mind is that sterling went south despite the Bank of England having raised the official interest rate above 0.5 per cent for the first time in a decade. Normally you would expect the pound to rise on a rate increase, because foreign investors would get more for their money. The fact the markets ignored the Bank of England suggests they aren’t convinced Theresa May can pull off a deal with the EU at the October summit.
Market traders are simple folk and like round numbers. Currently sterling is trading at around 90 pence to the euro. The feeling is that one pound to one euro is heading our way. That is very bad news if you are taking a European holiday.
There’s a myth that a cheaper pound has a sunny upside because it makes UK exports cheaper and so boosts sales. Reality is a bit more complicated. For starters, UK companies, property and assets are now cheap so expect foreign equity and hedge funds to start hoovering up. If you are a Chinese bank wanting a foothold in the UK high street, RBS is now an even more attractive acquisition. Scotland’s high-tech firms are also prime targets.
Also, to take advantage of cheaper exports you have to have something to sell. The UK’s range of export goods is not that exciting, which helps explain the fact that in the year to March – despite a weak currency – the UK had a current account deficit with the rest of the world of £80bn. That’s £80bn in foreign currency we have to beg, borrow or steal to pay for our imports. Britain normally finances that gap by selling off the family silver – plus acting as a magnet for wholesale global money laundering courtesy of the City of London.
There is an issue here for an independent Scotland. The SNP’s Growth Commission Report, authored in the main by Andrew Wilson (formerly of RBS), recommends that indy Scotland retains the use of sterling for the foreseeable future. That would leave the Scottish economy at the mercy of changes in the sterling foreign exchange rate – which remains volatile due to Brexit.
MEANWHILE IN THE WHITE HOUSE
There’s another element in the exchange rate situation we need to factor in – Trump’s dollar. One reason the pound has gone down is that the almighty buck is climbing like a rocket. Partly this is because the US central bank, the Federal Reserve, has raised interest rates seven times since late 2015. But it is also to do with The Donald. The US economy is booming thanks to Trump borrowing and spending like he wants a second term in the White House. In fact, Trump’s reckless borrowing and spending makes Jeremy Corbyn look like a fiscal conservative.
Now here’s the problem: Trump is financing his borrowing spree through short-term US Treasury loans. That is sucking in cash from around the globe. But in turn this is pushing up short-term interest rates throughout the world. The three-month Libor rate – the benchmark for global borrowing costs – has jumped to 2.3 per cent. It’s early days, but this is the first sign of a new credit crunch coming to a mortgage near you.
FALL OF THE HOUSE OF FRASER
The sad bankruptcy of the House of Fraser retail group and its purchase by Sports Direct brings back memories of that great Scottish entrepreneur Sir Hugh Fraser (1936-1987). Sir Hugh succeeded his father, Lord Fraser of Allander, as boss of the then stuffy House of Fraser stores back in 1966. Under Fraser Jr. a modern, zestful retailing empire was created. Eventually, Sir Hugh retired and House of Fraser was acquired (and subsequently ruined) by the Al Fayeds.
The interesting thing is that – almost uniquely for a businessman in the deeply unionist Sixties – Hugh Fraser was a convinced Scottish nationalist. He also funded the creation of the Fraser of Allander Institute at Strathclyde University as the first serious think tank researching the Scottish economy. I expect Sir Hugh is now turning in his grave. Firstly because of the demise of his retail empire. And secondly by the capture of the institute that bears his name by unionist pessimists. This column, on the other hand, is resolutely optimistic.