16 February 2019
The weaker pound has significantly boosted Britain's manufacturing sector. Photo: Bloomberg
The weaker pound has significantly boosted Britain's manufacturing sector. Photo: Bloomberg

The falling pound could be a blessing in disguise

Since Britain voted to leave the European Union in June, the pound has fallen by almost 17 percent against the dollar, despite a slight rebound recently.

The “flash crash” on Oct. 7, when the pound tumbled 6 percent just within minutes, bolstered fears of a “hard Brexit” among global investors.

As Martin Wolf, chief economics commentator at the Financial Times, has put it, the market has taught Prime Minister Theresa May “a good lesson”.

Undoubtedly, the plunge in the pound has triggered widespread repercussions not only in Britain but also across the global market in the short run.

But is the plummeting pound totally a bad thing for the British economy in the long run?

Probably not, because we believe there may actually be a silver lining to it, as it has provided both the British people and their government with a rare opportunity to reflect on their over-reliance on the financial sector and property market as engines of growth of their economy over the past two decades.

In the meantime, the lesson the British have drawn from the falling pound may also provide some very useful insight for Hong Kong, whose economic growth has also been too dependent on financial investment and the property market, to the extent that high property prices are already hurting Hong Kong competitiveness.

As one of the major global financial centers, Britain undoubtedly relies heavily on the financial sector as the main pillar of its economy.

Britain’s EU membership has further reinforced its role as a global financial hub by helping to attract hot money flows from around the world into London, thereby further boosting the size of its financial industry and its share of the GDP.

At the same time, however, it has hollowed out a large chunk of the British manufacturing industry and undermined the diversity of the economy.

Suffice it to say a strong and dominant financial industry in Britain is like a powerful drug: the more successful it is, the more the country is addicted to it, leading to the decline of other economic sectors such as manufacturing and exacerbating the country’s dependence on it as the sole growth powerhouse.

As such, we believe there is indeed an upside to the plummeting pound, as it can lead to a period of national introspection in Britain over its economic structure, as well as a sense of urgency and determination among its people to rectify its highly unbalanced economy.

Recent economic figures speak volumes about how a weak pound could be a blessing in disguise for Britain.

The fact that the Purchasing Managers’ Index (PMI) of Britain, an indication of factory activities in the country, jumped to an average 53 in August and September (Editor’s note: a huge acceleration from just 48.3 in July) suggests that the falling pound has significantly boosted British exports and the country’s economy is actually performing better than initially feared right after the referendum in June.

Even in the worst-case scenario in which the EU will impose tariffs on British products entering the continental Europe, the extra costs for British manufacturers are likely to be offset by a weak pound.

As regards Hong Kong, our dependence on the financial sector, the property market and offshore hot money flows, particularly from the mainland, is even heavier than that of Britain, with the manufacturing sector almost completely eliminated from our economy.

Given that, isn’t it also time for us to rethink our economic strategy?

This article appeared in the Hong Kong Economic Journal on Oct. 21.

Translation by Alan Lee

[Chinese version 中文版]

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