The once-mighty pound sinks into feebleness

Press, 7 February 1985, Page 26

The once-mighty pound sinks into feebleness

By

MARCUS ELIASON,

of the Associated Press, through NZPA

NZPA-AP London The pound, which once ruled the world economy has fallen on hard times pummelled down to its lowest exchange rate by the United States dollar and the volatile oil market. The decline that began more than 17 years ago (with only one brief respite) accelerated last November and peaked in January, when the pound reached 1.10 to the dollar on the Hong Kong market. To the British it meant higher mortgage rates and headlines predicting the ultimate indignity — parity with the dollar. While a weak pound is not necessarily all bad for the economy, it is seen by many as a symbol of how the mighty have fallen. An empire that once ruled onefifth of the globe and held one-third of its markets has shrunk to little more than a handful of small islands, and the British pound, which used to dominate the world’s economy, is near the bottom of the basket of hard currencies.

Underlying the immediate causes of the pound’s feebleness — oil and the dollar — is the widely-held perception that Britain is afflicted by a mysterious malaise that saps its industrial vigour while the West Germans

and the Japanese forge ahead. The pound fell 20 per cent in 1984 against the dollar. It has dropped steadily from a peak of 2.45 in 1980 to as low as 1.10 on some markets in early January. The sterling index, which measures the pound against a basket of hard currencies, has fallen six percentage points since November. It recovered slightly after the latest meeting of the Organisation of Petroleum Exporting Countries produced no price upheavals. But the likelihood of sterling’s quickly regaining its past strength is remote. To the average person in Britain, the immediate effect of the pound’s fall has been a rise in interest rates of 4.5 percentage points in January, to a record 14 per cent, meaning higher mortgages for home-owners and tighter credit for businesses. Parity with the dollar would be a severe psychological jolt for a country whose currency dates back to 760, when Offa, King of

Mercia, decreed that ”240 pennies would be struck from a pound of silver. The Prime Minister, Mrs Thatcher, says Britain’s economic performance is much better than the pound reflects. “It’s something of a mystery,” she told a television interviewer. Indeed, the country appears to be recovering from its long recession. Its balance of payments is in the black, oil production is at record levels, and inflation has been crushed from an annual rate of 20 per cent in 1980 to about 5 per cent. Investment is at an alltime high, and among businessmen one encounters a mood of buoyancy that contrasts sharply with the gloom of the mid-19705. In terms of what it buys the average British wage-

earner, the pound should be worth $l.BO, according to a calculation by the Parisbased Organisation of Economic Co-operation and Development (0.E.C.D.). The dollar’s strength has hit all the European currencies. The pound fell 20 per cent against the American dollar in 1984, but only 7.5 per cent against the West German mark. Oil accounts for 20 per cent of Britain’s export earnings and 8.5 per cent of its tax revenues. So the oil price slump means fewer United States dollars earned, but the pound’s weakness means those dollars buy more sterling and increase tax revenues. The pound has also been hit by a suspicion in market circles that the Government is wavering in its commitment to fight inflation. Real earnings increased 7.5 per cent last year, more than inflation. The money supply is growing faster than planned, and the Government faces problems controlling that supply because of difficulties in selling bonds.

Projections for public spending over the next three years augur more of the severe restraint that has typified Mrs Thatcher’s first five years in office. Some economists are beginning to urge Mrs Thatcher to copy President Ronald Reagan’s deficit economics to stimulate business.

“The Government has nailed its colours to the mast of fiscal control and it doesn’t seem to be behaving in the appropriate way,” Mr Tim Congdon, of the London stockbroker, L. Messel and Company, said in an interview. The benefits of a weak pound are a rush by foreigners to buy real estate, which in turn boosts

confidence in Britain. The streets of London are filled with American tourists spending healthy dollars. Britain has survived many sterling crises. Ravaged by World War 11, the pound fell from $4.03 to $2.80 in 1949. In 1967 it was devalued to $2.40. Five years later it became a floating currency and a steady decline began, interrupted only briefly in 1980 when the pound shot up to $2.45 on the promise of the North Sea Oil bonanza.

Now, as sterling languishes near parity with the dollar, experts once again ponder whether the problem is more deep-seated than interest rates and oil.

Mr Douglas McWilliams, deputy director of the Confederation of British Industry, sees Britain’s ailment as “lack of investment, insufficient attention to marketing, and getting the product wrong.” Britain still has a lowtech industrial base, he says, and the Third World is undercutting its prices. Today, many of the economists who urged Britain to prepare for life without the captive markets of empire are sounding the same warning about life after the oil runs out. They say the country must modernise its labour relations, be more aggressive in seeking new markets, and improve its ageing infrastructure of roads, railways, drains, and water supply. Analysing the pound’s decline in the weekly magazine, “New Society,” political economist, Michael Stewart, said that Britain was losing the battle for micro-electronics and biotechnology. “Unless we make a radically new departure,” he wrote, “the tolling of the bell for Britain will become ever louder and more insistent.”