A pounding for sterling in 2013?

£20 notes Could the pound see a big fall in its value this year?

The year has begun with mutterings about the pound - with some suggesting that it is about to fall off a cliff.

You won't get my prediction here. Economic forecasting is a dodgy business at the best of times, and currency forecasts are the least reliable of the lot.

But it's easy to see why the pound could weaken in 2013. David Bloom, for example, of HSBC, predicts that 2013 will be the year in which the currency's "underlying frailties will be exposed".

For starters, the lack of a decent recovery means that the Bank of England may have to loosen monetary policy even further this year, meaning that the market interest rate that foreigners can earn holding sterling will stay very low.

If the government loses its top AAA credit rating - as many expect - that could also reverse some of the "safe haven" flows into sterling that we have seen over the past few years. Especially if people decide (rightly or wrongly) that the fears hanging over the eurozone and the US have gone away.

That comparison with other countries is the key. After all, it's not as though our economy looked so great in 2011 and 2012. It was just that other places looked even worse.

If that has changed - and that is a big if - then the pound could well fall in 2013. We could "lose the contest of the uglies", as Mr Bloom puts it.

But I don't think George Osborne or the Bank of England would be very worried if that happened. In fact, they would almost certainly be relieved.

Export boost?

You might have hoped that a more than 20% fall in the value of the pound during the financial crisis would have been enough to help us start to re-balance the UK economy - boosting the competitiveness of UK plc, and so reducing the gap between our exports and our imports. But it hasn't worked out that way.

Our exports have grown: the value of our total exports was about 25% higher in the third quarter of 2012 than in 2007. (If you want a comparison, German and Spanish exports - trapped inside in the eurozone - have risen 15% over the same period.)

But the volume (as opposed to the value) of UK exports has actually fallen since 2007. In other words, exporters are earning higher margins, but there is not much sign - in a very challenging global environment - that they are building market share.

Even more worrying, in the short term, is that alarming statistic I flagged up last week: the Office for Budget Responsibility expects us to run a current account deficit of 4% of GDP in 2012. Put it another way, the UK as a whole probably borrowed more from the rest of the world in 2012 than it has in any of the past 20 years.

We would usually say a country with a 4% of GDP current account deficit and a fairly moribund domestic economy was a country in need of a hefty fall in its currency.

We have had one of those already, after 2007. That had painful consequences for UK living standards, because a fall in the currency doesn't just make UK goods cheaper abroad, it also makes everything we buy from overseas a lot more expensive.

Unfortunately, like all those other "one-off" sterling devaluations in the past 50 years, it does not appear to have been enough.

Stephanie Flanders, Economics editor Article written by Stephanie Flanders Stephanie Flanders Former economics editor

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  • rate this

    Comment number 77.

    Actually against the Euro we have been falling since the 1.285 of July 2012. Such heights provoked Mervyn King to heavily hint he wants a fall.

    "the effective exchange rate of sterling has risen by 8 per cent and against the euro by 12 per cent. That is not a welcome development."

    But if falling sterling is caused by a weak UK economy how is the Euro rising then?

  • rate this

    Comment number 20.

    Steph - you are supposed to be economics editor yet you don't comment on the most momentous news in recent times: the fact that even central banks are beginning to loose faith in each other with Germany joining Venezuela in repstriating their gold reserves. As faith in all paper currencies declines they will all continue to devalue (not just sterling)

  • rate this

    Comment number 11.

    Thanks this is the last thing I wanted to hear. Had my pension deastroyed by Mr Brown and now my Savings and any future I had planned for by Mr Cameron. I just give up on the UK its just impossible to plan for any future here. We are led by a bunch of Monkeys and its time to send them packing.

  • rate this

    Comment number 12.

    Australia, New Zealand, Norway, Switzerland (for example) must be in real trouble with their strong currencies!

    QE and zero interest rates don't produce the desired result - eroding the value of your currency leads to poverty not prosperity.

    I wonder if we'll ever see economists stripped of their knighthoods?

  • rate this

    Comment number 115.

    Let me agree with John from Hendon 113

    "Many people on this blog have valid things to say about the economy - but it is impossible to express these in the short sound bite format of 400 characters."

    Frankly when we had longer comments many were better than Steph's posts!


Comments 5 of 267



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