The falling pound is spurring exports but any predictions of a bumper boost to the economy from trade may be premature.
The Bank of England on Thursday became the latest forecaster to weigh into the debate. In its quarterly Inflation Report, it said that the effect of currency depreciation could be limited if British companies choose to maintain their prices in foreign-currency terms, taking the extra pounds generated to boost their profits instead.
It noted that when the pound fell by about a quarter in 2007-08, for example, sterling export prices rose by about 15 percent.
“Foreign-currency export prices, therefore, tend to be cut by around 40 percent of any fall in sterling. U.K. exporters become somewhat more competitive but also allow margins to rise.”
Much also depends on world trade, which appears to be growing at a lackluster pace. A sharp fall in the pound during the global recession of 2008-09, for example, failed to prevent exports from tumbling. Here's U.K. export and import growth since 2005:
In addition, factors such as consumer taste, the quality of goods and a lack of suitable substitutes are often more important than price, with implications for exports and imports. Moreover, business is increasingly carried out through global supply chains, the complexity of which has made trade less sensitive to exchange-rate movements.
Here's VoxEU in a recent paper, downplaying the currency impact on exports:
“The underlying assumption of the ‘currency wars’ discussion — that devaluations bring about substantial export gains — may be severely flawed. Non-price/non-exchange rate factors often appear to explain the lion’s share of export outcomes, and this is particularly the case when exports are measures in value-added terms.”
The task of predicting trade flows has been made all the more difficult by uncertainty over how firms will react to Britain leaving the EU and the shake-up in trading arrangements. That’s perhaps reflected in the range of forecasts seen recently.
The National Institute of Economic and Social Research sees net trade — the effect changes in the trade deficit have on economic output — contributing a healthy 1.7 percentage points to GDP in 2017 and 2018.
Less optimistic is the Confederation of British Industry, which sees trade adding half a percentage point in each year. Similar contributions are implied by the BOE’s latest forecasts.