Albert Edwards, Societe Generale’s notoriously bearish strategist has a rare bit of positive news for the citizens of Britain, and it is about the pound.
Writing in his weekly Global Strategy note, Edwards — who is renowned for making big, bearish calls on the state of the world — argues that the recent crash in the pound, which has seen Britain’s currency plumb new lows on an almost daily basis in recent weeks, will benefit the UK by stimulating inflation, something that virtually every single developed nation is struggling to achieve right now.
Here’s the key extract from Edwards’ commentary, circulated to clients on Friday (emphasis ours):
From much of the commentary about sterling’s plunge, especially as it now revisits the depths it briefly flirted with during the flash crash, you would think the UK is in crisis. It is not. My own view is partly shaped by my worries about the deflation risk in the western economies.
The UK, like the eurozone and the US, has core CPI hovering close to 1% and is almost certainly just one decent recession from experiencing Japanese-style outright deflation. In that context I see sterling’s plunge as the envy of the world. Using a weak currency to devalue oneself out of deflation works by boosting wage inflation via an initial squeeze on spending power through higher import prices. Domestic companies will also be able to raise prices as foreign competitors raise prices and who knows, maybe even interest rates could rise! I dont call that bad news. I call that a much-needed normalisation.
Edwards’ argument that a weakening pound is hardly revelatory. The fact that falling currencies make exports more competitive and imports more expensive, driving inflation, is one of the more simple principles of economics, but Edwards’ assertion that there is any positive from the falling pound flies in the face of much that has been written about the pound in recent days, especially the huge negative press coverage the brief halt on Unilever products being stocked by Tesco received.
Edwards notes that he is backed by a handful of commentators and economists, including Telegraph International Business Editor Ambrose Evans-Pritchard, and former IMF deputy European director Ashoka Mody. “Brexit has fortuitously corrected this long-standing distortion in the British economy,” Mody wrote in The Independent on Monday.
“It is desirable from every point of view. The idea that Britain is in crisis or is on its knees before the exchange rate vigilantes is ludicrous,” Evans-Pritchard added in a column for The Telegraph.
Earlier on Friday, Bank of England governor Mark Carney said that the bank is prepared to tolerate inflation passing above its 2% target in the coming few years to prevent higher unemployment.
“Our judgment in the summer was that we could have seen another 400,000-500,000 people unemployed over the course of the next few years. So we’re willing to tolerate a bit of overshoot in inflation over the course of the next few years in order to avoid that situation, to cushion the blow,” he said at an event in Nottingham.
In the same note, Edwards argues that while the pound’s annihilation in recent days is good news, there is a far more important story developing in the FX markets — the Chinese yuan.
“We warned in June that “sterling will fall with or without Brexit – but the renminbi decline matters more” and so it does. The Chinese have accelerated the renminbi devaluation, taking it to six-year lows versus the US dollar. This is the key global story to focus on, not the pound,” Edwards argues.