Any Brit who spent the holiday period in continental Euro-zone Europe is no doubt feeling the pinch. Espressos now average €5 a shot in Paris, while a melted cheese sandwich could set you back as much as €10 - and that’s in an average no-frills brasserie.
So can we expect this state of affairs to last long? According to Bank of America the prospects for GBP don’t look hopeful. First of all, the BoE is by all means expected to deliver as much as a 75 basis point cut when it meets this Thursday. This is likley to put sterling’s recent small respite against the euro firmly back on ice. As the team puts it:
Profit-taking appears to have sent EUR/GBP lower. While the pair remains vulnerable to additional near-term correction, a sustained reversal is unlikely. GBP is likely to experience further depreciation in 2009 given the UK’s relatively large current account deficit and the likelihood for a lagged economic recovery vis-à-vis the Eurozone.
But is a prolonged devaluation of sterling really such a bad thing?
Monday’s comment piece in the FT by Peter Oppenheimer - now a student emeritus at Christ Church, Oxford — argues that really we should be looking at this the other way round. It’s not that sterling has suddenly become massively devalued, it’s just that it was greatly overvalued for a very long time. As he explains:
The Brown boom threatens to prove far more damaging than its predecessor, because it lasted so much longer — more like 10 years than two-and-a-half — thanks to international payments patterns and elastic credit markets.
This meant a correspondingly prolonged overvaluation of sterling and of UK assets. British export capacity, especially in manufacturing, was severely eroded. In the face of poor productivity performance, expansion relied on immigrant inflows and external borrowing. British consumers became habituated to unsustainable spending, based on misleading indicators of household wealth as well as lax credit conditions.
As a result, Oppenheimer says, it follows that the most promising development for re-expanding Britain’s economy in the medium term is the decline in sterling rather than knee-jerk fiscal stimuli.
Related links:
Great (British Pound) Expectations - FT Alphaville
We can collapse our own currency, thank you very much - FT Alphaville
We may soon appreciate the advantages of weaker sterilng - FT
