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An Explainer: Why It Could Be a Good Thing That the Pound Is Now Worth Less

Marmite will get more expensive and wages will go down, so why do many economists believe a weaker pound is good news for Britain?

by Sam Wolfson
20 October 2016, 9:52am

Source: Steve Woodmore

First they came for the migrants, and I did not speak up, because I was not a migrant. Then they came for the Marmite, and I was like "LOL WUT, TESCO HOW CAN YOU DO THIS?? I'M A #LOVER...MADDD 4 THE BROWN STUFF!!!"

Yes, it seemed for a moment as if the biggest casualty of the Brexit vote so far would be Brits' beloved yeasty spread. Unilever – the company that makes Marmite, as well as Hellman's Mayonnaise and Comfort fabric softener – wanted to raise wholesale prices by 10 percent to offset the money they were losing from the falling pound (they're an international company, so the £1.50 people spent on Marmite – which, last year, was worth as much as $3 – is now only worth about $1.84).

Tesco refused to cough up the extra cash, and instead responded by removing all of Unilever's products from their website. This prompted David Davies, Tory MP and seemingly a man who doesn't understand that more expensive things cost more money, to tweet this:

The two companies have now come to a resolution, but the struggle raises a bigger issue: how worried should we be that the pound is worth less?

Here's a cheeky bit of macro-economics that you have to know. Currency, like anything, has a value. The pound is worth less today than it was a few months ago. That means if you get paid £1,000 a month, that £1,000 is now worth less than it was before Brexit. That doesn't really matter when the £500 rent you pay is also worth less, but becomes immediately noticeable when you go to, let's say, America, and all the rainbow bagels and rare trainers you want to buy are way more expensive.

But it will start to become more noticeable here, too. For example, when Jacob's Creek pay their farmers in France and California, they're going to have to spend more pounds to pay them the same wages in euros and dollars. That means if you want to buy a lovely bottle of Jacob's Creek Sauvignon Blanc, you might have to pay a bit more. Or if you work at the Jacob's Creek head office, you might find your Christmas bonus looking a bit paltry.

The weaker pound is already affecting the prices of petrol, air fares, clothes and food, because these are sectors heavily reliant on international imports, and there are more rises predicted the future. This means most of us are going to feel poorer, particularly families on low income, because many government benefits and tax credits – which used to be linked to inflation – have been frozen until 2020, so while prices go up, these families won't receive any extra financial assistance. The Institute for Fiscal Studies reckons that more than 11 million households will, on average, be £360 a year worse off if inflation rises to 2.8 percent in the next few years. Families on lower incomes, who receive more in benefits, will experience a reduction of £470 a year.

All of which makes life harder for ordinary people. So why is everyone from the Spectator to the Guardian celebrating the weaker pound?

Well, for many years the UK has been running a current account deficit: we have been importing more than we export. That's not really sustainable, because it means our economy is propped up by borrowing, consumer spending (people taking out big credit card loans to go on shopping sprees) and foreign direct investment (selling various parts of Britain off to foreign investors, like Tata Steel). Much of our economic growth has also come from the housing price bubble.

Basically, our economy has been growing but we are spending more than we're making, and that has a tendency to lead to an economic crash. In fact, almost every economic crash in recent times has been precipitated by a large current account deficit.

A weaker pound should mean that it's easier for Britain to export its goods to foreign markets, because prices for buyers will be cheaper. Industries like tourism will boom, as foreign visitors flock to the UK for cheap prices (ironic, considering many people voted for Brexit because they wanted fewer foreigners in Britain) and companies should experience increased demand from international customers. Even at a basic level, if you sell homemade dreamcatchers on Etsy, for example, it will now be cheaper for someone in Oregon to buy one and you might find you sell more of them. Unfortunately, you won't be able to buy as much with your sweet dreamcatcher profits, but that's sort of good for the economy overall – it stops growth being so reliant on spending.

Put simply, a weaker pound means our economy will become less reliant on us buying stuff at the shops and more reliant on us selling our goods and services to other countries. This should create a more balanced economy, reducing the current account deficit. This was always going to happen at some point; the fact that it has come about from Brexit only means that it hasn't come about from some terribly damaging crash.

Of course, with economics, things aren't that simple. Some think tanks believe that reduced spending and rising inflation will fuck economic growth even if exports increase. Others warn that, because of the political implications of the Brexit vote, many foreign investors won't invest in Britain even if it's cheaper, because they're afraid our country is a shitshow run by a bunch of loons who will soon find it impossible to secure decent trade deals.

But it seems that most economists – including former governor of the Bank of England, Mervyn King – think a weaker pound is long overdue and entirely necessary. That won't make much difference to you when Marmite inevitably does become more expensive, or if you work for an import-reliant employer that refuses to give you a pay rise because they're absorbing higher costs. But it could help redress big problems in the UK economy, a necessary change considering the turbulent and uncertain times ahead.

@samwolfson

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