A new Economics blog from John Birchall
Just when is a low exchange rate a problem?
Despite growth for the last quarter of 2009 being revised upwards to 0.3% the pound is moving downwards against the US dollar.
In conventional economics teaching this would mean that our exports would, after time and depending on price sensitivity appear to be less expensive, whilst our imports would increase in price. I am always a little concerned by the naivety of text books and web sites on this as trade is more complex than just prices and exchange rates. However, we have to cope with the static nature of the subject and predict accordingly.
So, what is happening, why and what might be the outcome?
It seems that ‘markets’ are worried about:
• Our price index increases, which at 3.5% and possibly still to move upwards are causing concerns about competitiveness – might a low exchange rate help this – or do we compete on non-price in most of our high research intensity markets?
• Our public sector debt is high but then we have just emerged from a recession and I am convinced this is more political than economic, is close to that of Greece but we are not a member of the Euro Zone , so we can watch a depreciation in the exchange rate without worrying about causing structural problems for other economies
• The size of this debt is causing another concern and that is our ability to repay before credit rating organisations start to question our 3 A rating – surely the ‘PIIGS’ will be the first to suffer this and not the UK? In fairness I am not alone in this belief; Mervyn King has said the same.
• The chance that Gordon Brown may remain in 10 Downing Street after June 2010 – though do the ‘markets’ really want an untested Mr Osborne to be popping next door and worrying Mr Cameron in Number 10?
It is interesting to watch German Chancellor Merkel struggle with the German designed Convergence Criteria for the Euro – being in Brussels for three days earlier this week is always a good time to test who is talking to who and the two G’s were not exactly having direct communications – though at EU level the Greeks have had a visit and the Finance Commissioner is due in Athens this coming Monday.
So, will we ride out our debt problems and favour the ‘second’ letter of the wise economists, or will we move towards the content of the first ‘wise men/women’ letter? Will we gain from an extra competiveness boosts and see our growth forecasts increase, so re-building the six per cent hole quicker than forecast? It’s a fun time to be teaching economics!!!
http://news.bbc.co.uk/news/business/market_data/currency/11/13/default.stm
The above has lots more on exchange rates
So, of course, do all the PAU books and the Economic Review – good reading to you all,
John
25th February 2010.
PS. Whilst in Brussels I was given the following power point presentation. You might find it useful. Ben is pleased to allow its use.
CLICK HERE to view the presentation