Sterling and Exports - The Importance of Time Lags

Roger Bootle has an excellent article on the lagged effects of a competitive exchange rate in today’s Telegraph. One of his arguments is that the default behaviour of many UK exporters is to take higher profit margins from their overseas sales rather than cutting their prices to boost export volumes. Crucially the impact of a lower currency takes time to show through in the international trade data and this is partly because switching production to countries where the exchange rate is favourable cannot happen overnight .... read this paragraph:

“Where export prices are not cut, this does not necessarily mean that the weaker currency will do no good. It is rather that the benefit will take longer to come through. In response to higher profit margins, firms will have more incentive to sell abroad. In the economic textbooks, selling abroad, or switching from European to Asia markets, is simply a matter of pressing a button. In reality it isn’t like this; sales networks have to be established, modifications to the products or services made; foreign relationships built up. These things do not happen overnight.”

The article reminds us that a more competitive exchange rate helps to re-balance the economy at a time of domestic weakness. But that the benefits of a weaker pound have been diluted by

(i) Supply-side weakness in UK industries (e.g. a lack of some aspects of non-price competitiveness) (ii) Low demand in key export markets - not least the European Union (iii) Longer than expected time lags between a fall in the currency and a pick up in export sales

Many exporters have also been held back by problems in accessing trade credit - few importers pay in advance for goods and services sold overseas!

More of the Roger Bootle article can be found here: The competitive pound is one of the few things we have got going for us