Brexit & The Pound - Where Do We Currently Stand And What Causes The Mess?
You're probably sat there thinking "Blimey, that's a hard question to answer." and to be fair, you'd be right. There's a way round it however, as we're going to take a little bit of deep dive into what's happened with all things economics; well, as best we can. Hold on to your hats folks.
What's Actually Happened To The Pound?
All those currency graphs don't exactly fill you with hope, do they? Well, truth be told, it has gone down, pretty dramatically. As the result of the referendum came in just over three years ago, the Pound against the Dollar stood to get you $1.32 at its lowest point, down 10% from that day's opening. Even now, with the slight hope of a Brexit deal on the horizon, we're sat at $1.27, a five cents drop.
That being said, the currency markets have been seen to be volatile (susceptible to change) over the last few days, with the Pound becoming a little stronger with Deal-based euphoria engulfing financial markets. However, as negotiations rumble on, it appears like that's died down a little, with traders holding back. Admittedly, there's a lot to get your head round. We're all trying our best to understand it as time slips away towards the 31st October deadline.
So, How Does It Affect Me? And In What Ways?
It's a prevalent question, there's no doubt. So, we're going to try our best to go through it a little.
The Pound, since 1992, has been a free-floating currency, meaning that it's free to be compared and traded against other currencies, like the Dollar and the Euro. These traders determine what the currency is worth - it's all speculation at the end of the day. When the Pound rises in value, more of it is being bought up. Conversely, when it goes down, more of it is being sold, perhaps due to the fact people don't know what's going to happen with Brexit and all - this 'uncertainty' lark.
A weaker pound (i.e. one that decreases in value) can cause a multitude of things to happen. Firstly, if you're off on holiday, you're getting a worse deal on the amount of other currency you can buy for your Pounds. Now, whilst currencies go up and down on a daily basis, when big events happen, like Brexit, the effects of these peaks and troughs particularly are worse. Whereas a few years ago you might've got $1600 for your £1000, now you're getting only £1280, which can make everything seem a little more expensive if you're buying stuff abroad to bring back.
As well as holiday money, the actual costs of everyday things might rise. This is really dependent upon both trade agreements and the way businesses have reacted. A weaker Pound has direct links to prices of both imports (goods/services entering a country) and exports (goods/services leaving a country). A fall in the Pound causes the costs of these imports to rise. A good example here is oil - as oil's world price is in dollars, the price of a barrel of oil could rise, causing petrol prices to rise. However, oil can also be affected by the OPEC cartel and circumstances beyond our control, like the antics of Middle Eastern countries.
With more expensive imports, those in the supply chain may put prices up accordingly, causing businesses' costs to rise, which will then ultimately be passed down to us as consumers. It's not a fun business by any means. Businesses will blame uncertainty for this and there's a real grain of truth to that; the British economy is one that majorly relies on spending from the likes of you and I and without that spending as we're scared of what will happen, businesses will make less money and retract their spending accordingly.
However, what links to this particular and wider issue is the current account deficit that the UK runs. A current account deficit, for the benefit of an explanation, is where there is more money going out on the UK's balance sheet than there is coming in. We usually refer to this in terms of imports and exports, where we're spending more out than we're getting in from exports. For the majority of the last 40 years or so, we've been running at such a deficit. What this means is we're rather reliant upon inflows of goods to make up the numbers. It's worth noting that Britain runs a surplus in services, which we're pretty good at in all due seriousness. Things like finance and insurance, compared to the goods which are dragging us down to a fair extent.
This deficit has to be financed by attracting foreign investment on domestic assets, or other forms of capital inflows. This can have its benefits as increased foreign investment, encouraged by low corporation tax, helps the economy and employment opportunities out massively. There is a risk however, if things go wrong, kind of like what's happening now really, that those foreign firms shut up shop and move elsewhere. This is known as 'capital flight' in economic circles.
What this can mean is higher regional unemployment and ultimately, a worse-off economy. For Britain, this is a worse case scenario as our main export is actually cars, which equate to around 10% of what we ship on boats worldwide to be sold, but there's very little of a British car industry left. All of the ones you can think of - Nissan, Honda and right down to former British marques like Mini and Jaguar-Land Rover, are all foreign-owned firms and them shutting up shop could be pretty bad for the UK. One thing that's got be considered for all this is that it's hypothetical - firms like Mini and Jaguar-Land Rover would never fully move production abroad due to their long-held heritage in Britain. To lose that would be a loss of Britishness in a way.
There's a slight chance that exports could increase with a weaker Pound as British goods become more attractive abroad, but there's a significant time lag in-between a weakening currency and countries becoming more alert to better deals. This is something key to consider moving forwards, especially with an economy that's biased towards consumer spending as opposed to business investment and exports. Britain is yet to achieve this export-led growth that other nations have.
To sum up, we're currently standing in some really sticky European mud with little way out. We're worse off than we were three years ago by way of currency and there's no way of telling what's going to happen in the future. It's a myriad of reasons that has caused this mess and I for one just hope we can get out of it. Hopefully this article has put some of your minds at rest and helped out with some clarification.