Only a competitive exchange rate can save the UK economy

The pound is overvalued and holding back the one sector that can drive growth

August 22, 2022
The UK needs more good jobs in industry. Photo: Image Source / Alamy Stock Photo
The UK needs more good jobs in industry. Photo: Image Source / Alamy Stock Photo

The UK economy is right now facing a combination of stagnation, low growth and high inflation. If we do not tackle this problem once and for all, we risk falling further and further behind the rest of the world, especially the emerging economies in Asia.

We must refocus the public conversation on generating economic growth and recognise that this will require revitalising our manufacturing industry. But right now, the expansion of manufacturing is impossible because investing in it is not profitable. To remedy this, we need to make the pound much more competitive. It has fallen since the Brexit referendum but it is still overvalued. Bringing it in line with the dollar will allow investment in manufacturing to become profitable and propel the sector’s growth, taking the economy with it.

Settling with the status quo won’t only kick the UK to the sidelines of the global economy, it will seriously undermine the country’s future because we are relying on a fundamentally broken economic model. We are currently being forced to choose between overheating the economy or triggering a recession in order to finance our massive budget deficit. An economy completely dominated by services will never consistently generate the 2 per cent annual growth which would allow us to avoid this choice while maintaining a high standard of living, good social and healthcare, and strong tax revenue.

Boosting growth through manufacturing is far easier than services because it’s simpler to increase productivity in the former. That’s why history shows that rates of GDP growth are correlated with investment in technology, mechanisation, and the generation and application of power.

Despite this, the proportion of the UK economy made up by manufacturing has steadily declined, from about 30 per cent in 1970 to less than 10 per cent today. Furthermore, more than 15 per cent of people worked in manufacturing around 30 years ago compared to 8 per cent today. This means that the unparalleled economic benefits from the manufacturing sector’s ability to generate higher growth are not being realised.

My new book, Why the West Is Failing, lays out how, if we do not take radical action to accelerate growth, the crises we are facing today will only get worse. We must get manufacturing back up to 15 per cent of GDP—a very achievable task. We have some of the most modern, clean and innovative manufacturers in the world. Just last month I was at an automation firm in Wakefield, and the feats of manufacturing and engineering being carried out every day are one of the great untold British success stories.

But as it stands, the UK’s economy isn’t structured to support manufacturing. The potential of British manufacturers is being stifled by exports being far too costly. This is not because machinery or materials are more expensive here than elsewhere, but because most domestically incurred costs such as wages, as well as almost all overhead costs, interest charges and taxation, are too high to ensure exporting firms remain competitive. The exchange rate, which is used to translate domestic prices into those offered to world markets, is the primary reason for this.

The pound is still dramatically overvalued, making our manufactured products extortionately expensive when we’re selling them to the rest of the world. The services sector can cope, but running the country with an exchange rate to suit services is short-sighted. Condemning the country to sluggish, unprofitable manufacturing exports makes for low levels of investment, slow growth, stagnant real incomes and a profoundly unbalanced economy. We must bring our own currency roughly in line with that of the US to make our products more affordable and attract investment.

We can’t rely on small or temporary adjustments to the pound’s value—we need to commit to a fundamental exchange rate policy reform so that investors know the factories they break ground on today will be profitable investments for the foreseeable future.

It is no secret that a high-growth economy lies at the heart of achieving a prosperous society. But the UK has seen painfully slow growth for years and we face several serious challenges. The cost of living continues to rise, regional inequality is soaring, public services are crumbling and our armed forces are worryingly underfunded. We can no longer rely on reactive measures and band-aid solutions—driving growth is more urgent than ever.

Meanwhile, economies in the east, most notably China, have seen growth that we could only dream of. Successive British governments have confused a services-first economy with a modern economy, designing policy in favour of financial services in particular. They fail to recognise that manufacturing has moved on from the days of dirty and dangerous workshops to become a modern industry rooted in advanced and clean technology.

This isn’t a party political issue. We must put ideological agendas and political posturing aside. We need to switch from having inflation as the main target to having growth as our principal priority, and the Bank of England and the government must commit to this. It goes far beyond simply selling our products overseas more cheaply. It’s about creating high-quality, well-paying jobs in deprived and hollowed-out communities. It’s about ensuring that regions outside of the southeast have enough to sell to the rest of the world. And it’s about restoring Britain to its former status as a true economic powerhouse.