At the start of September, the pound fell to its lowest level since the immediate aftermath of the EU referendum result in 2016. On that occasion, its value quickly rallied as markets and currency exchanges adjusted to the new political reality. This time, with the UK in a state of political turmoil and a no-deal Brexit looking ever more likely come 31st October, there are concerns Sterling could endure at its weakest value in 35 years for the forseeable future.
A weak pound means a weak economy. Forget all attempts to dress it up otherwise. And on the front line feeling the sharp edge of its effects are the small businesses trading overseas which are having to deal with eroding margins and turbulence in their supply chains.
In truth, UK businesses have been adjusting to a weak pound for the last three years. But the sharp falls seen since the middle of summer, plunging Sterling below the symbolic $1.20 mark, have rocked import and export businesses alike, wiping out confidence amongst SME owners as they contemplate what might happen next.
Above all, it is the instability which is really biting into the trade prospects of British businesses. With no one sure if a last-minute Brexit deal will be struck or not, or what the impact of a crash-out will be, the markets are taking a cautious, if not pessimistic, view of trade with the UK, which is keeping the value of sterling depressed.
On top of that, with no one sure about what kind of trade arrangements will be in place with the EU after October 31st, supply chains are already starting to suffer disruption as future orders fall into an administrative and logistical blackhole of uncertainty.
No export bounce
The conventional wisdom is that a drop in the value of a currency is bad news for importers but good for exporters. The first part of this certainly holds true for UK importers at present. According to the FT, many UK importers from the US saw their margins wiped out when sterling hit $1.25 against the dollar. A quarter of UK businesses are currently absorbing cost increases rather than pass them on to the customer, but that is not sustainable. At some point, retail prices on imported goods will have to rise, which will hit consumer spending.
What is even more worrying in the current climate is that the continued fall in the pound has not led to the expected rise in UK exports, even as British-made goods and services become cheaper to overseas buyers. The British Chamber of Commerce has reported export growth falling in 2019 compared to 2018, with two thirds of manufacturers stating that fluctuating exchange rates were a concern for their business. It was a similar pattern in 2016, when a 12% slump in the value of the pound failed to trigger any increase in export volumes.
This also needs to be put in the context of the UK’s trade deficit, the fact that as a country we import more than we export. The deficit grew from 3.3% of GDP in 2017 to 3.9% of GDP in 2018. With export growth weakening despite the fall in the value of the pound and import costs rising, it is hard to see how this won’t increase again in 2019. As a trade deficit increases, more downwards pressure is applied on the value of a currency.
No one quite knows what to expect come 31st October. But the fear is that a perfect storm of sluggish export demand, plummeting value of the pound and rising import costs will put firms out of business, see unemployment rise and retail costs soar.