April 24, 2009 6:02 pm

Pound is looking palatable

It used to be that one of the main draws of France for the British was eating out. With the only peril being having to watch your foie gras consumption, you could venture from your rented villa to hit a different restaurant every day of the week and still end up spending less than on your weekly shop at Waitrose in the UK.

No more. Last week in the south-west of the country, not far from Carcassonne, my husband and I managed to palm our small children off on relatives for a few hours and go out to lunch together. We went to the local town’s best restaurant, had nice things to eat and shared a bottle of wine. The bill came to around £120.

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Merryn Somerset Webb

Later that week, I took my mother out to lunch to thank her for containing the children during our lunch. We went to an ordinary restaurant on the square in nearby Limoux and had (very ordinary) steak and chips. The bill? £50. That’s just not cheap.

Note that the average main course at St John in London’s Clerkenwell, now officially the 14th best restaurant in the world as measured by the San Pellegrino World’s 50 Best Restaurants awards, costs a mere £15. Go for a starter, a pudding and a couple of side orders and you’d still be pushed to get your bill up much beyond the price of my second lunch – let alone anywhere near the price of my first (which was definitely not taken at one of the world’s 50 best restaurants).

You could argue (as the French do) that France has become generally more expensive over the past few years. But the key driver behind the collapse of the gîte and frite dreams of Britain’s middle classes is clearly the pound. Sterling has fallen 10.2 per cent against the euro in the last 12 months and 26 per cent against the dollar.

There’s a general feeling that this is a dismal state of affairs that will continue indefinitely and that the pound is pretty much finished.

Look at Country Life. Its advertisers appear to have pretty much given up hoping that sterling buyers will turn up for any of their overpriced houses: Savills now quotes both dollar and euro prices too (which is how I know there is a daydreaming estate agent out there who thinks he might find a foreigner prepared to pay €5.83m for a five-bedroomed house in Dulwich).

But I don’t think that we should resign ourselves to a decade of “staycations” just yet.

Sure, the UK economy is in a shocking state. Credit conditions are still tight in spite of the endless bailouts, interest rate cuts and money printing exercises. Unemployment is 6.7 per cent and rising. Consumption is falling along with house prices and the general savaging of our personal finances. Our public finances are horrible, as Alistair Darling conceded in his budget. And the latest figures show that GDP fell 1.9 per cent in the first three months of this year. That’s the biggest decline since 1979.

However, a currency doesn’t just measure the state of an economy in isolation. It measures it relative to all other economies. The pound may not feel like much of a powerhouse of a currency any more – and it isn’t. But what (apart from gold) would you rather hold?

The dollar, backed by a massively indebted government taking a scarily ad hoc approach to the banking crisis? The euro, backed by a mish-mash of countries all collapsing in their own special ways and just a little too embroiled in the car crash economies of eastern Europe? The yen, a currency universally recognised to be far too strong given that the economy it represents has just reported its first trade deficit in 28 years in the wake of a catastrophic fall in exports?

The truth is that while things are utterly awful here, they are no better anywhere else.

The IMF, which is hardly kind to the UK in its forecasts (our economy is forecast to shrink 4.1 per cent this year), has the eurozone shrinking by 4.2 per cent in 2009 and poor Germany – which never even had a housing bubble – by a nasty 5.6 per cent .

It could be time, suggests BDO Stoy Hayward’s Catherine Macleod, to consider that the UK is, in a sense, “the canary in the cage”. Being a very open and competitive economy with flexible labour markets, it should be expected that bad news would “filter through” – and be priced into the currency – more quickly here than elsewhere.

It might be hard when looking out from the UK to see any reason why the pound might strengthen, but look out from most other countries and it’s hard to see why their currencies should be any stronger, either.

The UK economy is a mess; the budget was pretty pathetic stuff; and we clearly have several trying years of austerity ahead of us.

But with so much bad news already priced into the pound and so little into other currencies, my guess is that this time next year I’ll find lunch in Limoux costs less than it did this year.


Merryn Somerset Webb is editor-in-chief of Money Week and previously worked as a stockbroker. The views expressed are personal.

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