UK: CURRENCY MOVEMENTS GIVE THE US AND UK THE EDGE.

UK: CURRENCY MOVEMENTS GIVE THE US AND UK THE EDGE. - British and American firms are boosted by the rise of the yen.

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Last Updated: 31 Aug 2010

British and American firms are boosted by the rise of the yen.

The turmoil in foreign exchange markets which marked the early months of this year is now beginning to be reflected in economic performance. Japanese companies face the biggest challenge following the sharp rise in the yen. In the US and UK, firms are enjoying an added boost from a lower exchange rate.

The chart highlights how currency movements have affected cost competitiveness in recent years. Since 1992 unit labour costs in Japan have risen more than 60% relative to those in competitor countries, while costs in America have fallen by around 20%. At present the UK falls between these two extremes, having managed to maintain the boost to competitiveness obtained from the devaluation of sterling in 1992. With inflation consistently low, recent falls in the pound have only served to boost British and American competitiveness still further.

Following the rise in the Deutschmark and an uncharacteristically poor inflation performance, Germany has lost competitiveness in recent years. Japanese firms meanwhile are stepping up their investment in plant and machinery overseas, and German companies are increasingly looking to low-cost sources of production in eastern Europe. Loss of competitiveness will hit growth prospects in Germany and Japan over the next year, says Keith Wade, chief economist at Schroder Economics, while US and UK firms should continue to increase their share of international markets.

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