Weak pound strengthens UK’s export-led recovery

UK exporters significantly more confident than continental counterparts

The weak pound has fuelled the UK’s export market to such an extent that British exporters are more confident about future export growth than their counterparts in the Eurozone, according to the latest European Business Trends report by accountants and business advisers BDO LLP. Since 2007, the Bank of England’s monetary policy has been a factor in devaluing the pound by around 22 per cent against the currencies of the UK’s main trading partners. This compares against the Euro which has gained around 7 per cent in value. Such a disparity has resulted in UK exporters having a significant competitive advantage over their European rivals, with UK exporters far more optimistic. UK exporters boast a 1.2 point rise in optimism over the last three months, compared to a 0.4 point rise in the Euro area1 (see graph below). However, while UK confidence around exports is increasing, so too is the threat from inflation. The BDO Inflation Index reveals that Britain experienced the largest ever increase in the annual rate of inflation in Q4 2009. The BDO inflation index rose 99.2 in January, a significant increase compared to October 2009’s reading of 93.8. This compares to the Eurozone inflation index which rose to 89.6 in January from 89.2 in October. Kim Hayward, Lead Partner for BDO LLP in Southampton commented: “The Bank of England has got it right so far. However, there is a risk that low interest rates and quantitative easing could increase Britain’s vulnerability to inflationary pressures. Mervyn King is treading a fine line between higher inflation and economic recovery. Despite recent encouraging news, the balance of risks is still on the downside and the Bank should continue its activist approach to monetary policy in the near term.”

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