In these conditions of uncertainty, the exchange rate has collapsed. But the scale of the decline has been greater than anyone had predicted. Sterling has fallen sharply against the US$ to a level not seen since the 1980s and there have been similarly sharp falls against the euro. In these cases there are now predictions that the rates may fall to parity within the next few months. The overall effect of depreciation on this scale is to reduce real national income and overall living standards – the cost of imports is increased and export prices are lowered.
For many years the UK has been running a deficit on its current account. In the second quarter of 2016 this was no less than 5.9% of GDP and deficits on this scale have been common for many years. Of course, a country can only continue to run a large current account deficit if it either has large foreign exchange reserves – the UK doesn’t – or else it borrows extensively overseas. Social Europe