Sterling: Effects of Appreciation (Hansard, 6 March 1997)

§ The Minister of State, Department of Social Security (Lord Mackay of Ardbrecknish)
My Lords, despite the recent appreciation of sterling, the trend in export volumes is still upwards, the deficit on trade in goods has continued to narrow, and manufacturing output has been rising.

§ Lord Paul
My Lords, I thank the Minister for that Answer, which was expected. Does he really know what is happening in manufacturing industry? Firms are not making the margins—they are exporting goods at no margin—and are considering how to make workers redundant. That will lose jobs for which skills are not available and it is causing a huge problem in industry. As regards the balance of payments, the effect will only come in six months, not now.

§ Lord Mackay of Ardbrecknish
My Lords, I appreciate what the noble Lord, Lord Paul, says about the concern of exporters about the value of the pound. However, recent survey evidence shows that export orders are still expanding. Indeed, export volumes in the fourth quarter of 1996 were 8 per cent. higher than a year earlier. Therefore, given the figures we are seeing and the reports we are receiving from surveys, I do not believe that the export position is as the noble Lord suggests.

§ Lord Dixon-Smith
My Lords, is my noble friend aware that some of us at another time and under another government will remember when the dollar stood at 1.12 or 1.14 to the pound? Does my noble friend agree that the markets value the currency for its intrinsic worth at a particular time?

§ Lord Mackay of Ardbrecknish
My Lords, my noble friend is right to draw attention to the fact that floating currencies, as is ours, vary in their value. Indeed, last night, the noble Lord, Lord Kingsdown, made an interesting speech on just that point. He had to deal with the declining value of sterling at that time.
As a non-economist, I find economists an interesting breed. They seem to be against an appreciation and against a decline, and I am not entirely sure where that leaves us. The fact is that governments cannot dictate exchange rate levels. When they attempt to do so they usually come unstuck.

§ Lord Acton
My Lords, is the Minister aware that at the time referred to by the noble Lord, Lord Dixon-Smith, when the pound was worth 1.12 dollars, the Government were headed by the noble Baroness, Lady Thatcher?

§ Lord Mackay of Ardbrecknish
My Lords, yes, that is exactly the point that I made when I referred to the 1965 noble Lord, Lord Kingsdown, who was then Governor of the Bank of England. If, in today's world, noble Lords opposite believe that that was bad they must surely welcome the appreciation of sterling that we are now seeing.

§ Lord Wallace of Saltaire
My Lords, can the Minister say why Britain, with, we are told, the strongest economy in Europe, is still running a manufacturing deficit while the weak economies of France and Germany seem oddly to be running manufacturing surpluses?

§ Lord Mackay of Ardbrecknish
My Lords, one must look at the whole picture and not just manufacturing. As I explained in my Answer, manufacturing is showing good exports both in the surveys and the figures that we are seeing. Indeed, we are moving up the all-important league table of quality exporting. The issue is not only price but also quality and after-sales services. I believe that many of our industries, especially industries coming into this country, are greatly improving. If the noble Lord had been present during the debate last night he would have heard me explain how many parts of British industry are doing extraordinarily well. I believe that motor car exports from this country are 25 per cent. higher than in 1978.

§ Lord Eatwell
My Lords, is the Minister aware that all historical experience demonstrates that the effect of a significant depreciation in the currency takes eight to nine months to be seen, and the experience of British industry, described by my noble friend Lord Paul, suffering reduced orders and cutting jobs, is shown right across the manufacturing sector? Is the Minister also aware that the CBI and Oxford Economic Forecasting have significantly reduced their forecasts of the rate of growth of the British economy as a result of the high value of the pound? Does the Treasury agree with those forecasts? And what will be their impact on the fiscal position?

§ Lord Mackay of Ardbrecknish
My Lords, as I said in my Answer to the noble Lord, Lord Paul, we understand the problem that exporters were having. But recent survey evidence shows that export orders are still expanding, and that is the case. It is the position that if sterling remains at about the present level, then exporters will have to watch their competitive position in world markets.
I wonder, as I did last night, what the noble Lord wants me to do. Does he want me to interfere in the market? Does he want me to abandon floating exchanges? I do not know what one is expected to do in a climate in which we at least believe that matters should be left to the floating exchange rate. We must ensure that the fundamentals in our economy are right; that is, low inflation and bringing down government borrowing. As I explained to the noble Lord, Lord Eatwell, last night, that is exactly what we are doing.

§ Lord Pearson of Rannoch
My Lords, is my noble friend aware that one of the main reasons for the strong 1966 pound is that sensible Germans and other Europeans share the Government's fear of a euro and are therefore buying pounds in large numbers because they hope we will not be so foolish as to join EMU?

§ Lord Mackay of Ardbrecknish
My Lords, I congratulate my noble friend on managing, as always, to bring in Europe. He has a point that it is largely against the continental currencies that the major appreciation is taking place—19 or 20 per cent. appreciation against the deutschmark since August 1995 but only 4.5 per cent. appreciation in the same period against the dollar. Part of the reason is that the dollar is moving up and sterling is being pulled up with it. Speeches like the one made by Mr. Alan Greenspan recently will continue to encourage that move. As my noble friend said, I believe that it indicates a certain lack of confidence in the continental European economies on the part of investors.

Lord Bruce of Donington
My Lords, the noble Lord asked a question of this side of the House. In view of the fact that as yet no answer has been given, may I reply to him, given that my predictions in such matters have usually been correct, and say that the Government should reduce interest rates by 2 per cent?

§ Lord Mackay of Ardbrecknish
My Lords, I have no doubt that the world outside will note the policy of the party opposite, but I must say to the noble Lord that that would inevitably lead to problems with inflation which I believe would cause much more damage than the problem of appreciating sterling.