The phenomenal post referendum plunge in the value of Sterling led to the short lived stand-off between Unilever and Tesco. The dispute was over the extent to which increased import costs should be passed on to customers for products such as Marmite and pot noodles.
GBP-USD Exchange Rate 2016. Source: Bloomberg
This has led to much speculation on the implications for the UK economy of the reduced value of the pound. It is clear there will be significant impacts on UK cities.
First the positives. We are likely to see a big increase in inbound tourism and stay-cations, as overseas visitors take advantage of cheap holidays in the UK, and UK residents recoil from a big increase in accommodation and food and drink costs abroad. For Leeds this could accelerate further our already fast growing tourism sector.
Exporters have also received a boost, particulary manufacturers, proving a very welcome economic stimulus following the referendum. This, along with the likely negative impact of Brexit on UK financial services, has led some to think that Brexit could result in a helpful rebalancing of the UK economy. They argue that a shift from over reliance on financial services concentrated in over-heating London to manufacturing based in the Midlands and the North would be a good thing.
But most economic commentators believe the cons will far outweigh the pros. I think there will be five negative impacts on cities.
First the impact on financial and business services will not just hit London; it will impact on other major cities too where, as Andrew Sentance has highlighted, financial and business services are the most significant and fastest growing sectors.
Second, the benefits to exporters could be overstated. The benefits of a low pound need to be weighed up against the implications of the UK leaving the Single Market, which 74% of manufacturers believe will be a negative move. As Frances Coppola has argued, UK manufacturing is now specialised, highly skilled with complex and globalised supply chains. Many “exporters” now actually import a lot of their raw materials and components, all of which will now be more expensive. The cost of rising energy and labour costs are yet to bite. Whilst manufacturing remains an important part of our economy (for example there are still around 30,000 manufacturing jobs in Leeds), it is fanciful to think that there will be a sudden expansion in the sector to become as significant as it is in nations such as Germany.
Third, we will become a less attractive destination for inward investment. Our position as one of Europe’s most attractive destinations for inward invetsment (around 42,000 UK jobs were created from inward investment projects in 2015) will undoubtebly be hit as a result of Brexit even without the fall in Sterling. For cities such as Leeds, with numerous foreign-owned firms and as the second most attractive Core City inward invetsment destination in 2015, the impacts could be significant.
Fourth, as David Smith argues in today’s Sunday Times, the Sterling crash will exacerbate the wider sense of economic uncertainty and instability, all of which will deter business investment and hit our already sluggish productivity. This is far from a managed devaluation. There have been wild fluctuations in the value of the pound, such as the flash-crash on October 7th. We will see inflationary pressures, which may prompt a fiscal response. The cost of UK Government gilts have risen in recent days, increasing the cost of public sector borrowing (although it remains at very low levels by historic standards).
Finally, perhaps most significantly, living standards will be hit, as the prices of everyday essentials such as transport, energy, and food (Marmite included) rise. This will hit people on low incomes hardest, including many in cities. For example in Leeds there are around 80,000 jobs (many of them part time – indeed some people are juggling two or three part-time jobs) that pay less than the “Real Living Wage” of £8:25 an hour. For those who do not feel they have benefitted from economic growth and globalisation, the majority of whom voted leave (see this excellent analysis from JRF), the negative impacts of the falling value of Sterling will far out-weigh the benefits of the current short-term economic stimulus.
Many cities have set out the actions they will take in response to Brexit, for example our five point plan in Leeds. It is clear that our cities face significant challenges ahead. In the context of further austerity, respondingto an increase in prices and the subsequent decline in living standards which will hit the poorest hardest may be the biggest challenge of them all.