Word on the web: Weak pound boosts exports

As signs emerge that households are about to feel the pain of a falling pound, exporters could be the only ones left enjoying the benefits of sterling’s downward spiral 

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It may have been the people that voted for Brexit but, so far, it is the markets and investors that have borne the brunt of the fallout. This week, we finally started to get a sense of how Britain’s vote to leave the EU is going to affect the man (and woman) on the street. 

On Tuesday, Sky News reported on the striking findings of Credit Suisse’s Global wealth report 2016: the collapse in the value of the pound against the dollar since the vote for Brexit – from around $1.50 (£1.20) to around $1.25 (£1) – has wiped $1.5tn (£1.2tn) off the collective wealth of UK households. 

Put another way, wealth per adult in the UK has fallen by $33,000 (£26,500) to $289,000 (£232, 257) since the end of June.

Investors have understood the impact of the fall in sterling for some months now. The Sky News report notes that, even though stock markets have rallied since 23 June, they still remain well below record values in dollar terms.

Householders have only really felt the pain when travelling abroad and getting fewer dollars for their pounds. That is likely to change at some point next year when inflation spikes, driven by exports to the UK becoming more expensive due to sterling’s weakness. 

Sky News article

Pricing pressuresMid-week, former Sainsbury’s CEO Justin King’s comments on Tuesday’s BBC Newsnight were widely reported. King predicted that food prices are likely to rise by around 5% in the coming year. 
$1.5tn
The amount wiped off the collective wealth of UK households since Brexit

“Around 40 to 50% of what we buy in the shops is sourced abroad in currency other than the pound,” he said. “With the current rates of exchange we can expect that to be around 10% more expensive in a year’s time. If that’s half of what we buy, that’s something in the order of 5% inflation.”

The Huffington Post's George Bowden reported that that was much higher than the Bank of England’s November forecast of 2.7% consumer price inflation in a year’s time.

King predicted that sterling’s fall could result in a big name retailer failing in the near future. Those that could afford to hold back price rises would be safest, he suggested.

Huffington Post article 

Exporters benefitIt isn’t all doom and gloom, however. The Confederation of British Industry, which held its annual conference on Monday 22 November 2016, released its latest snapshot of the economy at the same time. 

The Guardian's Economics Editor Larry Elliot was among many to report on the findings, which showed that order books for UK manufacturers are strong and, over the next three months, production is expected to rise at its fastest pace in almost two years as exporters benefit from the weak pound. But the CBI warned that the fall in sterling is pushing up the price of raw materials for manufacturers.

Companies in other sectors reported good news too. UK-based global catering giant Compass attributed a 14% boost in pre-tax profits for the year ending September to the pound’s decline, according to Sky News

Travel firm Thomas Cook, which also reported its year-end results this week, said that despite business being hit by terrorist attacks in some of its main destinations, such as Turkey, the weak pound had helped to keep profits broadly on track. “Our revenue ... benefited from the stronger euro, when we translated our euro earnings back into sterling,” CEO Peter Fankhauser told the Financial Times. Thomas Cook makes around two-thirds of its revenue outside the UK.

And bank note printer De La Rue, which makes 80% of its revenue outside of the UK, said it would benefit from a sustained weakness of sterling. “It makes us more competitive in the market,” London’s Evening Standard reported De La Rue CEO Martin Sutherland as saying. 

On the face of it, the weak pound is proving good for exporters, at the very least. However, an article for The Conversation on Wednesday left the more upbeat among us with some food for thought. A study by academics Xeni Dassiou, of the University of London, and Athanasios Andrikopoulos, of the University of Hull, suggests that exporters only benefit from a fall in the value of their home currency if overseas competitors choose not to discount their own prices to eliminate this competitive advantage. 

No wonder, then, that prior to the EU referendum, Bank of England Governor Mark Carney warned that a vote for Brexit might leave the UK relying on the “kindness of strangers”. He may not have been referring specifically to a potential fall in sterling but the observation seems apt today.

The Conversation article

Seen a blog, news story or discussion online that you think might interest CISI members? Email jules.gray@wardour.co.uk.
Published: 25 Nov 2016
Categories:
  • Capital Markets & Corporate Finance
  • The Review
Tags:
  • Bank of England
  • Word on the web

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