Weak sterling’s impact on UK corporates
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.
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.
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