Economy: Currency Fluctuations - Motion to Take Note

Part of the debate – in the House of Lords at 1:40 pm on 17th November 2016.

Alert me about debates like this

Photo of Baroness Kramer Baroness Kramer Liberal Democrat Lords Spokesperson (Treasury and Economy) 1:40 pm, 17th November 2016

I point out that the noble Lord is assuming a permanent devaluation in the pound to the current level. I want to talk for a moment about the consequences that that would have, which was underscored by the noble Baroness, Lady McIntosh, for the standard of living in this country and the experience of very many people if we continue to have an economy where growth is so low that sterling remains at the current level.

As I say, there has been no dramatic pick-up in exports, and looking at devaluation as a route to increasing exports is a very dangerous one. At best, it has a short-term benefit, and over the long term it imports inflation. We have already seen significant rises in fuel prices, and ordinary people are feeling that. At the moment, though, people are being protected from large increases in retail prices because most major companies have foreign exchange hedges in place to get us at least through the Christmas season and into the early part of the new year. Some industries have not been in that position; we have heard the noble Lord, Lord Bilimoria, talk about the profit warnings that have come from the airline industries, from some of the retailers and, increasingly, from a large number of British companies across the board.

However, it is the small companies that were unable to put hedges in place that are particularly affected. A number of speakers have talked about that particular difficulty. Not only do the banks make hedging pretty much unavailable, it is also exceedingly expensive. I am very worried—I think the noble Lord, Lord Carrington, made this point—about the impact on small businesses. I have talked recently with some small chocolate manufacturers, who said that their import prices are already pushing them to the point where they think they can make it through the Christmas season without pretty significant increases, but they do not think they can make it into the new year season. The consequences for them are significant. I also happened to talk with some of the small wine shops that one sees. One could say that wine is an exotic product, but an increase of near on 20% for many of them on the products that they import is now putting them in a situation where even on modestly-priced wines, which are their meat and drink and their main source of trade, they are looking at having to pass on those increases.

What I have found fascinating in talking to these people is that, if one says, “What about substituting a British-made product?”, first, as others have said, frequently there are not many of those available, but, secondly, British suppliers are using this as an opportunity to increase their prices. Many have been feeling pressure on their profit margins for a long time, and the rise in the cost of imported goods is now putting them in a position to be able to increase their prices as well. So the knock-on effect for the consumer is genuinely a very serious one.

If anyone took a look at the survey done by the HR managers’ group that was made available about a week ago, they will have seen that overall, looking broadly at the economy, the general take is that inflation will be running at close on 3% next year, as several people have said, but on the basis of the surveys the expectation is that the average basic wage settlement will go up by only 1.1%. That is huge pressure in the pocket for ordinary people who have already gone through many years of austerity, and the consequence is really unpleasant and, frankly, very serious.

A big discount on sterling means there is almost a January sale on the price of buying a British company, whether you buy it on the stock market or buy it out from its current private owners. With a 15% discount, we would expect to see a large number of acquisitions of British companies taking place, but we are not. We are seeing some large and important investments—very often, ones that have been planned for a long time and are related not to price but much more to a global strategic move by particular companies. However, I have been looking closely at the fintech industry, where there has been a complete collapse in venture capital and equity available for UK-based fintechs since Brexit. Global investment has gone up significantly; in Europe, the biggest beneficiary has been Berlin. In the UK, though, we have seen that number fall very sharply. Anyone who wants more information about that should take a look at today’s Financial Times. That is just one of many reports coming in from that field.

The noble Lord, Lord Skidelsky, talked about the future. We have to have an economy that has many more roles than just being a financial services provider. Fintech—indeed, tech generally—surely has to be at the cutting edge of that. These are brand-new industries in an area where we have established ourselves as a leader, based on our brilliant universities, our experience in life sciences and our capacity in financial services. In all those areas, we have made extraordinary headway in being at the cutting edge of innovation. Yet this is the very sector that is suffering from a lack of interest from investors at a time when you would have thought they would say, “It’s exceptionally cheap. If we’re ever going to get in, this is the day to do it”. That is largely because of Brexit and, frankly, that worries me because it is the future that is being put at risk.

If British companies themselves thought the future was going to be so exceptional and a great time to advance exports, we ought to be seeing investment rolling into those companies. In fact, we have seen that British businesses have ditched about £65 billion of investment since June. Planned investment is down extremely sharply, some of it perhaps temporary and due to uncertainty but in some cases these are already permanent decisions to take the investment elsewhere. So when people talk about devaluation as offering a huge potential to restart the economy, spark it off and lead it into being an export-led economy, we need to look much more closely at what is actually happening.

Many, including the noble Lords, Lord Haskel, Lord Skidelsky and Lord Bilimoria, have pointed out the integrated nature of our economy today across the EU. I often suspect that, because we never really had any kind of political integration, people think that in the same way the business world stayed distinctly British, French, German, Spanish, Greek or whatever. In fact, what has happened in the last 40 years is that in a sense the business world, the economy, has become thoroughly integrated. It is almost like a piece of crochet; it is almost impossible to separate out the varying strands because it is now such a complex web. I think that is what the Government are finding as they go through the experience of trying to work out how they are going to deal with Brexit: what they thought would be very simple—say, identifying a British company that does imports, exports or whatever else—is in fact not. At every level, big, medium and small, we are in an entirely intermeshed world that is extremely difficult to identify. When you have something such as devaluation, it rebounds quite painfully on many aspects of that business network.

Others have said that one of the good things about devaluation is that it will encourage European workers to go back home, because their remittances will be worth less in their home currency. That has not happened; in fact, we have had the exact opposite, with employers desperately seeking to bring in European workers before what they think will be a gate that slams closed at the point where we actually exit the EU. So we have the opposite effect of the EU threat bringing in workers. As others have said, we are so close to full employment in the UK that that is not surprising, but the hope that devaluation would somehow send people out of the door has, I am very pleased to say, not actually transpired.

When we have inflation brought in through the increased price of imports, what will be the reaction of the Bank of England and the governor? Undoubtedly, at some point, interest rates will have to rise. Some have said that a rise in interest rates will be very good for the economy, but, my goodness, the impact on people who have mortgages, particularly when we are not getting increases in wages, will be really difficult. We are talking about people who have gone through years of austerity now beginning to face inflation in the price of products, then being hit by interest rates impacting on mortgages. Higher interest rates at a time when we need greater economic growth to take ourselves through a period of extraordinary uncertainty and disruption and to try to encourage companies to make a base here seems extraordinarily difficult.

So far, in my view and that of many others, Governor Carney and the Bank of England have managed this process with something of the skill of a tightrope walker, but it will be extremely difficult going forward. I have sympathy with the noble Lord, Lord Carrington, in calling for greater forward guidance to deal with some of the uncertainty. The problem is that I do not think that even someone with a crystal ball could give much guidance at this point, when it seems that the only thing that is expected is the unexpected and a sense of uncertainty is now so deep and prevailing that most forward guidance could not have a high level of certainty attached to it.

I also agree that it is time that UK Export Finance took on some of these issues for smaller companies trying to deal with both exchange rates and simply getting paid for their exports, as they are challenged to try to export much further afield. There is a very important role for UK Export Finance to play to get the banks back on the field in the way that they used to be until about 10 to 15 years ago.

In this area of uncertainty, which the noble Lord, Lord Paul, underscored, the most important thing that the Government could do is provide us with some clarity. By clarity I mean laying out the priorities, the principles on which they will negotiate our exit from the European Union. Companies, instead of finding themselves completely in the dark and having to make decisions on a worst-case scenario because that is all that is left to them to work with, could be provided with that kind of clarity. Will we be in the single market? What is our attitude towards the customs union? What will we do about migration and access to workers, both skilled and unskilled? We need answers; businesses need answers; and with that they could get at least a measure of certainty at a time when uncertainty is being reflected not only in the travails of quite a number of businesses but in this weakness that has driven down the value of sterling.