Weak ster­ling’s im­pact on UK cor­po­rates

Kuwait Times - - BUSINESS - by Hay­der Taw­fik

Ster­ling has fallen by over 20 per­cent against the US dol­lar, 16 per­cent against the euro and 23 per­cent against the Ja­panese yen since the 23rd of June 2016 and it could fall more if the Brexit terms is not trig­gered. This might not be good news but there are some win­ners out of what we can call a real and long waited de­val­u­a­tion of the pound ster­ling. As the im­pact of the de­val­u­a­tion fil­ters down to the econ­omy, it is al­ready af­fect­ing many com­pa­nies, in­vestors, con­sumers and the tourism in­dus­try. All im­pacted in dif­fer­ent ways and shapes. In the short term and for the long haul. Much will also de­pend on how much fur­ther the pound keeps fall­ing and for how long.

Most UK com­pa­nies that have very high ex­port ra­tio should ben­e­fit tremen­dously from this mas­sive de­val­u­a­tion. Com­pa­nies that sells most of their prod­ucts out­side the UK can now be very com­pet­i­tive against their com­peti­tors. Com­pa­nies like Burberry, Rolls Royce, Bri­tish Aerospace, HSBC and the tourist in­dus­try etc. The tourist in­dus­try should ben­e­fit from the de­val­u­a­tion of the pound im­me­di­ately as for­eign tourist can spend more time in the UK for less money.

CA prob­lem

The UK cur­rent ac­count should see in­crease in all in­come from abroad. This should off­set Bri­tain’s re­liance on for­eign goods and cap­i­tal. Econ­o­mists sur­veyed by Bloomberg see the coun­try’s cur­rentac­count deficit, near a record 7 per­cent of GDP, fall­ing to 3.9 per­cent by mid-2017 while the Bank of Eng­land ex­pects it to halve over the next three years. The UK FTSE stock mar­ket has ral­lied by nearly 20 per­cent from the date of the Brexit vote. This was not com­fort for for­eign in­vestors as it just off­set the fall in Ster­ling. Lo­cal in­vestors gained the most from the fall of the pound.

UK con­sumers might be one of the big losers out of the pound de­val­u­a­tion. The pound’s de­cline is set to boost in­fla­tion to 2.2 per­cent on av­er­age next year from vir­tu­ally zero in 2015, ac­cord­ing to the lat­est eco­nomic fore­cast. This means con­sumers’ money will be worth less and less. Con­sumer price growth al­ready surged to 1 per­cent in Septem­ber, the high­est level in al­most two years, with the prospects of more to come as some food re­tail­ers have al­ready warned of pos­si­ble price hikes.

Over­all, this might be bad news for the UK econ­omy as it has been re­ly­ing on con­sumer spend­ing for its steady eco­nomic growth. Lat­est of­fi­cial data show that In­put prices-in­clud­ing raw ma­te­rial, im­ported parts and equip­ment and other costs - rose an an­nual 7.2 per­cent in Septem­ber, leav­ing com­pa­nies with hav­ing to choose be­tween trim­ming profit mar­gins or hit­ting cus­tomers with higher prices. Also Bri­tish savers will lose out by ris­ing in­fla­tion, savers will see the pur­chas­ing power of their sav­ings de­cline, whether they’re plan­ning to cash out or di­ver­sify into non-pound-de­nom­i­nated as­sets.

In­ter­est rates

Mean­while, in­ter­est rates will likely re­main at record lows after the Bank of Eng­land cut rates in Au­gust and sug­gested more eas­ing may be on the way. The Bri­tish peo­ple voted for leav­ing the Euro­pean Union but the gov­ern­ment will drag its feet with Brus­sels to get the best exit terms. This could take a while to hap­pen and mean­while the pound could weaken fur­ther. — Rasameel

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