Executive Briefings

When Currencies Fall, Export Growth Is Supposed to Follow - Until Now

For decades, economics textbooks argued that suddenly weaker currencies are a boon to growth, because they make a country's exports more competitive or profitable on the global stage, which in turn boosts domestic production and employment. What if that theory no longer holds?

When Currencies Fall, Export Growth Is Supposed to Follow — Until Now

Economists and government officials are increasingly wondering if that effect is diminishing, especially among advanced Western economies with shrinking manufacturing capacity and supply chains increasingly interwoven with the rest of the world. The new idea is that much of the benefit from a falling currency is offset by the higher prices paid for components imported from overseas.

The U.K. is emerging as a test case for whether globalization has diminished the effect. Although its currency has been battered by the financial crisis, the Brexit vote to leave the European Union — which took place a year ago June 23 — and the country’s fresh bout of political uncertainty, its exporting power hasn’t responded as textbooks might suggest.

Chemicals made at Chemoxy International Ltd.’s factory in Middlesbrough are worth about 20 percent more in the export market after last June’s fall in sterling, given the beefed-up value of the currencies used to buy those goods overseas. Higher costs for imported materials, however, all but erased that advantage.

“We have a huge interdependency on international markets,” says Chemoxy Chief Executive Ian Stark. The company exports more than 60 percent of its products and imports about 85 percent of its chemical raw materials. A weaker pound, he says, “isn’t revolutionary.”

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Economists and government officials are increasingly wondering if that effect is diminishing, especially among advanced Western economies with shrinking manufacturing capacity and supply chains increasingly interwoven with the rest of the world. The new idea is that much of the benefit from a falling currency is offset by the higher prices paid for components imported from overseas.

The U.K. is emerging as a test case for whether globalization has diminished the effect. Although its currency has been battered by the financial crisis, the Brexit vote to leave the European Union — which took place a year ago June 23 — and the country’s fresh bout of political uncertainty, its exporting power hasn’t responded as textbooks might suggest.

Chemicals made at Chemoxy International Ltd.’s factory in Middlesbrough are worth about 20 percent more in the export market after last June’s fall in sterling, given the beefed-up value of the currencies used to buy those goods overseas. Higher costs for imported materials, however, all but erased that advantage.

“We have a huge interdependency on international markets,” says Chemoxy Chief Executive Ian Stark. The company exports more than 60 percent of its products and imports about 85 percent of its chemical raw materials. A weaker pound, he says, “isn’t revolutionary.”

Read Full Article

When Currencies Fall, Export Growth Is Supposed to Follow — Until Now