Weak Pound Not Noticeably Helping U.K. Exports

Includes: EWU, FXB, FXY
by: Lok Sang Ho

An earlier report found that the weak pound is failing to boost UK's manufacturing exports. This corresponds with the results of my own study.

For some unknown reason--perhaps readers can enlighten me--the sensitivity of UK's exports to exchange rate movements is the smallest among a number of economies that I studied. Moreover, this "elasticity" had actually dropped (halved!) in recent years, in contrast to the general increase in the measure that is observed for most other countries.

I ventured to suggest that it may have to do with its not joining the Euro zone. That is to say, while it has the liberty to depreciate its currency, importers in Europe may well have some built-in preference for exports from members in the Euro zone. I do not know if this is the true story, but I cannot think of another reason.

Nevertheless, there are reasons to expect a notable rebound in the UK economy before long. Its generally stronger ISM indices compared to the Euro zone does foretell growth in the fourth quarter, perhaps at a 2% annual rate or better.

The weak pound is not helping much. But it does help. Strong performance of its trading partners will also stimulate more exports. My calculations suggest that the income elasticity of demand for UK's exports is higher than that for Japan's exports, which is yet another reason why the Yen needs to depreciate.

Disclosure: No positions