The pound is regarded as an international currency, but its value has been declining throughout the financial crisis. Indeed, this downward trend is one of the factors that has prevented the recession in the UK from getting worse. As the exchange rate changes, the relative competitiveness of a country’s products changes and this therefore affects exports and imports.
However, despite a declining pound, exports from the UK have fallen and this has contributed to an unexpected global goods trade deficit in January of nearly £8 billion – the largest level since August 2008 and well above the forecast of £7 billion. This is putting further pressure on the pound. A key to the UK’s economic recovery was argued to be growth in exports, but this now appears to be a somewhat forlorn hope. The figures released show that exports slumped 6.9% to £19.5 billion in January, whilst imports only fell by 1.6%. A contributing factor might be the bad weather that hit the UK in January, but the long-term decline of manufacturing in Britain has also been put forward as a reason.
The following articles consider the UK’s trade deficit and the possibility of an export-led recovery.
Articles
January trade deficit widens as exports fall Guardian, Kathryn Hopkins (9/3/10)
UK trade gap widens to worst in 17 months BBC News (9/3/10)
Exports plunge heaps pressure on pound Independent (9/3/10)
Pound slides back against dollar and euro Guardian, Ashley Seager (21/9/09)
Trade gap widens despite weak pound Financial Times (9/3/10)
UK exports plunge by £1.4 billionThe Press Association (9/3/10)
Pound falls again on deficit fears Guardian (9/3/10)
UK trade gap widens as exports sink Wall Street Journal, Nicholas Winning (9/3/10)
Rebalancing, deferred BBC News blogs, Stephanomics Stephanie Flanders (9/3/10)
Global recovery is helping UK, says Bank of England’s Sentance Guardian, Larry Elliott (18/3/10)
Pound Declines as Investors Bet Bank of England Will Hold Rates BusinessWeek, Lukanyo Mnyanda (20/3/10)
Data
For UK balance of trade data, see UK Trade (Office for National Statstics)
For exchange rate data, see Statistical Interactive Database (Bank of England)
Questions
- How is the value of the pound determined?
- Illustrate a depreciation of the pound on a diagram. What are the factors that could cause this?
- When the value of the pound falls, why should UK goods become more competitive?
- Explain why an export-led recovery was a possibility for the UK economy. How can we use the transmission mechanisms to help explain this?
- Despite a weak pound, exports have fallen. What are the explanations for this?
- What are the consequences of a widening trade deficit and how can it be tackled?
One measure of the level of activity in the housing market is the number of mortgage approvals for house purchase. While a small number of approvals will not result in transactions because house purchases can ‘fall through’, the current number of approvals is, nonetheless, an extremely good guide to transaction levels in the near future. The seasonally-adjusted approval number for January 2010 reported by the Bank of England was 48,198. This has drawn a fair amount of attention because it was the lowest since May last year and it was the second monthly fall in a row.
The increase in mortgage approval numbers seen in the second half of last year represented an increase in housing demand and helps in understanding why house prices rose over the same period. But, we should perhaps put January’s approval figure into further context. 2008 saw mortgage approval numbers collapse to only 451,350 (or roughly 37,600 per month) from 1,323,609 (or roughly 110,300 per month) in 2007. The average monthly number of approvals across the last decade was 95,000 – roughly double January’s number.
So what a trawl through the figures shows is that the current level of approvals is by historic standards low, but still above the incredibly low levels seen during 2008. But, more than this, it suggests that we perhaps need to get accustomed to relatively low mortgage approval numbers. With financial institutions and households alike needing to remain cautious and rebuild their respective financial positions, we should expect ‘new norms’, so far as activity levels are concerned, for quite some time to come.
Articles
UK mortgage approvals fall for second month in January: BOE RTT News (1/3/10)
Mortgage approvals drop sharply BBC News (1/3/10)
UK mortgage approvals drop to eight-month low Bloomberg.com, Scott Hamilton (1/3/10)
Mortgage lending dives after end of stamp duty holiday Independent on Sunday, James Thompson (14/3/10)
Housing market turnover falls despite record low rates on new mortgages Financial Times, Norma Cohen (13/3/10)
Fears grow that new mortgage drought could hit house prices Times Online, James Charles (13/3/10)
Data
Mortgage approval numbers and other lending data are available from the Bank of England’s statistics publication, Monetary and Financial Statistics (Bankstats) (See Table A5.4.)
Questions
- What factors do you think will have contributed to the fall in mortgage approvals in 2008? And what factors might explain the slight recovery in the second half of 2009?
- What factors do you think will be important in determining mortgage approvals in the months ahead?
- How might changes in the number of mortgage approvals be expected to affect house prices?
- What role might financial institutions, like banks and building societies, play in affecting UK house price growth in 2010? How might their influence compare with that in the period 2008/9?
We have all heard about the troubles of Greece, but are things really that bad? It does have huge debts, which is costing about 11.6% of GDP to service; and estimates suggest that government borrowing will need to be €53bn this year to cover budget shortfalls. Furthermore, its situation could spell trouble for the eurozone and in particular for certain countries. However, as the article below discusses, Greece still has some trump cards to play.
Advantage Greece BBC News blogs, Stephanomics, Stephanie Flanders (3/3/10)
Questions
- “The single most important factor propping it (Greek debt) up in the past year has been that it can be swapped for free money at the ECB.” How does this prop up Greek debt?
- If Greek debt does fall in value, how will other members of the Eurozone be affected?
- Why are countries such as France and Germany hostile to a loan to Greece from the IMF?
- If Greece was to collapse, which countries do you think could potentially follow? Which factors have influenced your answer?
From the end of January to the beginning of March, the sterling exchange rate index fell by over 6% – from 81.7 to 76.5. Against the dollar, the fall has been even more dramatic, falling from $1.62 to $1.49 (a fall of 8%). What are the reason for this? And is the depreciation likely to continue? The following clip looks at what has been going on and whether the reasons are political, or whether there are other economic fundamentals that have contributed to sterling’s fall.
Stephanie Flanders on the pound BBC Politics Show, Jo Coburn and Stephanie Flanders (2/3/10)
Articles
One-way bet? BBC News blogs: Stephanomics, Stephanie Flanders (1/3/10)
Euro drops to lowest level in 10 months against dollar BBC News (2/3/10)
Fiscal and political fears hit sterling Financial Times, Peter Garnham (1/3/10)
Sterling’s slide is not just about polls Financial Times (2/3/10)
Sterling rout is more than a wobble over political uncertainty Guardian, Larry Elliott (1/3/10)
The pound is weighed down Guardian, Howard Davies (2/3/10)
Sterling jitters The Economist (1/3/10)
Sterling crisis might break Britain’s political and economic paralysis Telegraph, Jeremy Warner (3/3/10)
Questions
- What are the reasons for the depreciation of sterling between January and March 2010?
- Why was selling sterling a ‘one-way bet’ for speculators?
- Why might there have been ‘overshooting’ of the sterling exchange rate?
- Who gain and who lose from a depreciation of sterling?
- What is the likely effect of a depreciation of sterling on (a) inflation; (b) economic growth; (c) interest rates? Explain your answers.
- How do problems of government debt affect countries’ exchange rates?
The demise of the dollar as the world’s reserve currency has been predicted for a long time now. Yet it is still way surpasses other currencies, such as the euro and yen, as the main reserve currency of most countries. Also it still dominates world trade with much of international trade being priced in dollars. Indeed, as the eurozone reeled from the Greek debt crisis in early February (see A Greek tragedy and Debt and the euro) so investors sold euros and bought dollars. The dollar gained 12 per cent against the euro from December 2009 to February 2010 (from $1 = €0.66 on 1/12/09 to $1 = €0.74 by mid February).
But a number of economists, investors and officials argue that the dollar’s dominance is gradually being eroded:
As the United States racks up staggering deficits and the center of economic activity shifts to fast-growing countries such as China and Brazil, these sources fear the United States faces the risk of another devaluation of the dollar. This time in slow motion – but perhaps not as slow as some might think. If the world loses confidence in U.S. policies, “there’d be hell to pay for the dollar … Sooner or later, the U.S. is going to have to pay attention to the dollar”, [said Scott Pardee, economics professor at Vermont’s Middlebury College and formerly on the staff of the New York Fed].
So what is likely to be the future of the dollar? Will it remain the number one world reserve currency? Will its position be gradually, or even rapidly eroded? What will happen to the exchange rate of the dollar in the process? Finally, what is the significance of the trade and budget deficits in the USA? Are these of benefit to the rest of the world in providing the necessary dollars to finance world trade and investment? Or are they a source of global imbalance and instability? The following article look at these issues.
How long can the U.S. dollar defy gravity? Reuters, Steven C. Johnson, Kristina Cooke and David Lawder (23/2/10)
Is greenback’s dominance coming to an end? Stuff (New Zealand), Tony Alexander (24/2/10)
Reconstructing The World Economy Eurasia Review, John Lipsky (25/2/10): see final part on Reforming the International Monetary System. See also the following conference paper referred to in this article:
The Debate on the International Monetary System Korea Development Institute / IMF Conference on Reconstructing the World Economy, Seoul, Korea, Isabelle Mateos y Lago (25/2/10)
Questions
- To what extent does the world benefit from having the dollar as the main reserve currency?
- What is the role of US current account and budget deficits in supporting this reserve currency role? How important is the size of these deficits?
- What is likely to happen to the exchange rate of the dollar against other major currencies in the coming years?
- What alternatives are there to having the dollar as the world’s main reserve?
- Does it matter if China holds $2.3 trillion in foreign exchange reserves, with nearly $800 billion in US Treasury debt?
- Why is the value of its currency a less urgent problem for the USA ‘than it would be for other borrowers who borrow and pay for imports with dollars’?
- What are ‘currency swap accords’ and why are they important for China?
- What are the implications of the Chinese yuan being undervalued against the dollar by as much as 40%?