As the biggest rail strikes in a generation threaten to turn into a ‘summer of discontent’, confidence in Britain’s economy and the institutions responsible for managing it is fading. Zero or very weak growth is expected for the coming years. Inflation is likely to be higher and more persistent here than in many other developed countries. Even before the industrial action this week and the government’s obvious unwillingness to do anything practical to stop unions from crippling the country, ministers seemed to deny the scale of the crisis facing Britain .
One consequence is that the value of the pound has fallen against other major currencies. It’s not like some parts of the post-war period, when exchange rates were set by governments. Harold Wilson suddenly devalued the pound sterling by 14% against the dollar in 1967 and memorably said that did not mean that a “pound here in Britain, in your pocket” would be worth less. But that meant imports became more expensive, and it was not a real alternative to solving the structural problems that had left the UK uncompetitive with its peers.
Today, exchange rates are set by international markets, which increasingly take a dim view of the management of the British economy. The Bank of England was much slower than the US Federal Reserve in raising interest rates to contain inflation, which pushed the pound lower against the dollar. The government has no real plan to revive economic growth, which some forecasts will follow not only the United States but also much of Europe. More generally, there is no sense that the authorities are taking the current situation seriously enough.
The pound’s weakness will be felt by holidaymakers this summer, when they find that their money is not going as far abroad as in previous years. This will contribute to inflation, as the country will have to pay more to buy the goods and services it imports from abroad. It is also important for international trade that the value of the currency remains relatively stable.
The last thing Britain needs is another crisis to add to the growing list of trauma already inflicted on the public. The government and the Bank of England need to take inflation much more seriously. It’s not just their credibility that’s at stake.