Sterling depreciation and the UK trade balance

My brief for SPERI on the failure of sterling depreciation since the financial crisis to alleviate the UK’s trade deficit.

This brief considers the relationship between the relative value of sterling and the UK trade balance. When a country’s currency depreciates in value relative to its major competitors, its exports become cheaper (and imports become more expensive); the depreciation of sterling experienced in the wake of the financial crisis should therefore have boosted policy-makers’ efforts to rebalance the economy towards exports and away from the domestic consumption of imported goods – as occurred following depreciation in the 1970s and early 1990s. However, there is no evidence of an improved trade balance following the recent depreciation of sterling, suggesting significant imbalances in the UK economy.

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Image: Cristiano Betta