The pound’s devaluation since the EU referendum vote has failed to result in a significant surge of UK exports, according to new research by Pantheon Macroeconomics.
A currency devaluation historically results in a boost in exports and net trade, which in turn produces economic growth. However, as a new paper by Pantheon Macroeconomics shows, this hasn’t quite happened in the UK.
Over the past eight quarters, the research shows, net trade has contributed just 0.2 percentage points to 3.3 per cent growth in GDP.
However, that’s not to say that export manufacturers themselves have not benefited from sterling’s fall.
Goods exports have increased. According to the paper, excluding oil and erratics, goods exports increased by 7.8 per cent in 2017. By contrast, advanced economies saw goods exports grow by 4 per cent over the same period.
However, the response from UK firms to the pound’s devaluation dampened any potential surge in exports. UK manufacturers responded to the fall in the pound by raising prices. Prices for UK exports in foreign markets have fallen to just over 5 per cent in the past two years – however, prices would have been more competitive were it not for exporters raising sterling prices by about 12 per cent.
The pound’s fall in price has meant the buyers of UK exports have not felt these price rises to the same extent. However, it has dampened the extent of the pick up of exports. As Pantheon Macroeconomics notes: ‘Volumes would have surged, had exporters not hiked prices and prevented the depreciation from substantially improving their competitiveness.’
These price hikes have afforded UK exporters healthy profits. However, rather than reinvesting these profits to increase capacity, firms have decided to sit on their windfalls.
Firms have ‘hoarded cash rather than invested it to make the most of lower of exchange rates,’ notes Pantheon Macroeconomics.
The result has meant that UK firms have been working at historically high capacity. Pantheon Macroeconomics points out that the percentage of manufacturers in the UK working below capacity was the lowest level on record in the first quarter of last year.
The hoarding of cash and lack of investment suggests that UK manufacturers are uncertain about the future, while doubtful that growth in UK goods exports will continue.
The pound’s weakness has allowed UK exporters to raise prices, affording them a windfall in profits. However, the cash generated is, for the most part, not being used to invest in increasing future capacity. Instead, firms are sitting on the windfall, potentially as a buffer for any disruption down the line once the devaluation dividend wears off.
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