Brexit will not give UK exports a boost as huge as many of those who backed leaving the European Union have argued since the vote, according to new research from credit ratings agency Standard and Poor’s.
Since the vote, it has been a frequently cited argument by chief Brexit backing politicians and business people that the huge fall in the pound witnessed since the vote is not necessarily a bad thing, as it will give a massive leg up to the UK’s exports as foreign nations look to get cheap goods from the UK.
The theory goes that this will, in turn, provide a substantial boost to overall GDP growth in the UK.
However, in its latest research entitled “Brexit’s Impact, Part 2: Recession Averted, Slow Growth Ahead” — S&P argues that while there will inevitably be some growth to UK exports as a result of the pound’s depreciation, that impact may not be as sizeable as some might hope.
Here is the key extract from S&P’s chief EMEA economist, Jean-Michel Six (emphasis ours):
“One of the Brexiters’ key arguments was that a weaker pound exchange rate would benefit exports and hence overall economic growth. History is more complex. Sterling’s most recent depreciation, in late 2008 when the pound lost 16% against the dollar in six months and 28% against the euro, did not point to a large trade boost. At that time, consumer spending was dampened by the subsequent increase in import prices. That episode could arguably be seen as a special case, as world trade collapsed over the same period. However, we have many other episodes of sterling depreciation from which to draw conclusions.”
Six goes on to argue (emphasis ours):
“Since 1975, the pound experienced eight major bouts of decline. On average those episodes lasted six months, with the pound losing 13.8% against the dollar and 18% against the euro. The pound’s biggest drop against the greenback was in 1981 and again in 1982 (19% each time).
“In an econometric analysis, we found that a 10% depreciation in sterling’s exchange rate against the U.S. dollar would boost real exports of goods (excluding fuel exports) 2.5% to 3% over the following 18 months. More broadly, a 10% depreciation in the real effective exchange rate produces a 4% boost to real exports of goods.”
Now obviously, what big falls in the pound have done to exports before is not necessarily going to do the same thing this time around, and to use the old investing adage — “Past performance is not an indicator of future returns.”
However, the export boost given to Britain by crashes in sterling’s value in the past has not generally resulted in a substantial improvement in GDP growth, as S&P notes, with Six arguing:
“The net effect on real GDP growth will be more limited. For one thing, exports of goods represent only 15% of the U.K.’s real GDP. That ratio for Spain would be 21.6%, and for France 22.3%. Plus, the weaker pound reduces consumption via higher inflation. Chart 3 illustrates this trade-off, assuming a 10% depreciation of the pound against the euro.”
And here is chart three:
S&P’s research concludes that overall, the fall in the pound — which dropped to a 31-year low in the immediate aftermath of the vote — is likely to help UK exports increase by 7%. However, that will translate in a GDP boost of just 1.2%. Given that foreign direct investment, general business investment, consumer spending and other areas of GDP are expected to shrink substantially as a result of Brexit, that 1.2% is pretty insignificant.
However, S&P’s assessment is not all negative, and has followed in the footsteps of many major banks and research houses by scrapping its prediction of a post-Brexit recession, with Six arguing that “the sky hasn’t fallen” as a result of the referendum result. The ratings agency now expects UK growth to run at 1.8% this year, 1% next year, and 1.1% in 2018.