Rescue British industry. Sell the pound.
John Mills believes a new exchange rate policy is key to rebalancing the currency
Despite Rishi Sunak having had scarcely four weeks to bolster his credentials and enhance his profile, the new Chancellor’s first budget is not expected to spring many surprises. Many key spending commitments have already been announced. Given the historic cheapness of borrowing and the end of the long period of post 2008 retrenchment, this is going to be a budget focussed on investment.
What will not be clear until the Chancellor speaks is how much the coronavirus effect will be factored-in, requiring temporary reliefs and stimuluses to counter an immediate, but possibly short-term, environment defined by global stock market jitters and checks to growth.
Instant reactions though will not, in the long run, determine whether Sunak’s first budget will be forgotten, regarded as a missed opportunity or lauded as heralding a new start for Brexit Britain. When the 2008 credit crunch struck, there was much talk about rebalancing the economy. The extent to which this has happened would surprise and disappoint those who regarded it as not only desirable but inevitable back when financial liquidity was on life support.
If that rebalancing is finally to occur, then it will take more than an expensive train set between Manchester and London and 5G broadband in rural areas to bring it about. A strategic rebalancing involves shifting the UK’s current ratio of 17 percent investment to nominal GDP towards the global average of 25 percent. It is a short-coming that is one of the clearest factors in determining Britain’s poor productivity rates.
For years now, prominent businesspeople, perhaps most consistently the chairman of JML, the Labour-supporting Brexit backer, John Mills, have been arguing that this can only be achieved by fostering a rejuvenated light industry sector.
Yet, by what gravity-defying means is this to be achieved, given that Britain has been steadily deindustrialising for fifty years regardless of the party in power?
According to Mills, it will require reducing the sterling-denominated cost-base of British business. This can be done most effectually by a policy that actively encourages a further depreciation in the currency. To do so, of course, necessitates first and foremost a change in priorities not just from the Treasury but from the Bank of England. Sterling depreciation is not something to be just about tolerated, but, according to Mills, actively engineered. After all, through various means, it is what successful economies with strong industrial sectors like Germany, China and South Korea have been doing systematically for years.
We are no longer in a fight to control of inflation. That beast of the 1970s and early 80s is subdued and few can see it roaring any time soon. The issue for policy-makers in Whitehall and Threadneadle Street is therefore not risking inflationary pressure but how best to stimulate economic growth. Without it, the increasing burdens of health and pensions caused by a proportionately ageing population will become unserviceable. Toddling along at or around 1.5 percent GDP growth is not equal to this challenge.
As Mills put it to me, “what value for the pound would make it worthwhile to put a factory up in Gateshead rather than Guangzhou? I think you need to bring it down to roughly parity with the dollar. That is about 25 percent below where it is at the moment. You think that’s an enormous amount, but it is also the amount it went down by in 1931” when, to the horror of conventional wisdom, Britain came off the gold standard and saved itself from a yet worse recession by pricing exports back into competitiveness.
What value for the pound would make it worthwhile to put a factory up in Gateshead rather than Guangzhou?
Something similar happened recently when – to the despair of orthodox commentators and some analysts – sterling slid in response to the 2016 EU referendum and the ensuing slow water torture that was Theresa May’s unsuccessful efforts to get her unloved deal through Parliament. Yet, the currency depreciation provided British exporters with a boost at a time when uncertainty threatened them. John Mills believes that the only problem with that depreciation is that it did not go far enough to realise the sort of economic rebalancing he hopes to see. After all, he calculates that far from sterling currently being in a historic trough, “the exchange rate has doubled in real terms to where it was in the 1970s.”
And this is why Mills believes that a sensible devaluation would not merit or attract retaliatory action from competitors. “When the pound came down by 25 percent against the dollar between 2007 and 2009 there was no retaliation then” he points out. “The markets accepted it was an adjustment that had to happen.” That drop, in real terms, had been reversed by the eve of the EU referendum vote. Subsequent depreciation needs to be continued.
Mills, who with John Longworth and Brendan Chilton, has recently set-up the Foundation for Independence to test and project business opinion as a means of challenging the CBI’s influence in shaping the post-Brexit agenda, believes that now is the time for Rishi Sunak and the incoming Bank of England governor, Andrew Bailey, to begin the rebalancing of Britain’s economy.
“One of the things that Brexit has done,” concludes Mills, “is create a willingness to look at radical decisions.” But will Sunak’s first budget take radicalism in this direction?
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