Sterling strength no obstacle to recovery
Simon Ward
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A post in March argued that – contrary to the claims of the FT's Martin Wolf and many other commentators – sterling had fallen to a level implying significant and unsustainable undervaluation. This judgement was based partly on evidence from the quarterly CBI industrial trends survey – the percentage of manufacturers citing price competitiveness as a constraint on exports was the lowest since 1974.
Sterling's effective index has rallied by 14% from its low in late December and by 9% since March. Yet the July CBI survey, released during MoneyMovesMarkets' absence, shows that exporters remain bullish about their ability to compete: at 41%, the proportion citing price constraints remains far below its 1972-2006 average of 61% – see first chart. Worries about sterling's rebound aborting an economic recovery are therefore misplaced.
In any case, the July manufacturing purchasing managers' survey released today shows that domestic demand rather than exports is driving economic improvement. While the overall new orders index jumped to 55.9 last month, its highest level since November 2007, the export orders index was little changed at 48.5. Orders strength suggests an imminent resumption of manufacturing growth – second chart.
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