U.K. is in deep trouble, weak sterling may not help after all
in order for currency depreciation to work its magic, more demand for exports must be forthcoming when the exchange rate falls (or, as economists say, the price elasticity of demand for exports must be high). But various studies have shown that the price elasticity of demand for UK exports is low.
Ideally, the British government should aim to bring down imports as a percentage of GDP from the current high of around 30% to pre-1974 levels of around 20%. This may prove too ambitious, and the UK may have to settle for somewhere around 25% of GDP. But if something is not done, Britain risks permanent impairment of prosperity. A depressed economy can be reflated, and an inflationary economy can be depressed. But losing access to crucial foreign markets as a result of currency movements outside the country’s control is largely irreversible.