In For A Pound: A Look At The Economic Impact of Brexit

The events on June 23^rd left almost half of the country in a state of shock and, perhaps even despair. Now we are finding the Pound in a sticky situation, creating a dangerous level of uncertainty in business. We look at the state of our currency and what SMEs in Sussex can do to manage the consequential risk

Nobody knew what the outcome of a Brexit vote would be, and more importantly, nobody knew what would occur within this waiting period we currently find ourselves in; With the triggering of Article 50 seemingly a long way off still, the impact is being heavily felt through the state of the Pound itself. In turn, the effect of the weak Pound is being felt uniformly across the country but, as a study by FEXCO Corporate Payments suggests, unevenly across British business, with smaller firms bearing the brunt of higher import prices. All UK businesses that import – either raw materials or finished goods – have seen the prices they pay their foreign suppliers rise since the Brexit referendum earlier this year. However, a sharp spike in import prices has meant that many small and medium-sized firms have had to curtail their imports.

“The pound has declined in value as the prospect and reality of the UK leaving the EU develops,” commented Jonathan Watson, Chief Analyst at Currencies.co.uk. He added: “Importers of raw materials or anything from overseas will find a declining pound is driving up their costs and decreasing profit margins. These costs will be outweighed in some respects for companies selling overseas but for UK based firms they will struggle as they raise their prices to consumers, leading to less economic activity amongst those employed in low skilled and low paying occupations.”

The study by FEXCO Corporate Payments found that, in July, the total number of foreign currency purchases made by SMEs was a relatively modest 7% down on the same time last year. However the average transaction size was 29% less than in July 2015 as companies sought to rein in spending. Two successive months of reduced import spending suggest that SMEs are growing increasingly wary of importing, which has a large impact on Britain’s economic standing both in the EU and further afield.

David Lamb, head of dealing at FEXCO Corporate Payments, explained: “Four months on from Britain’s vote for Brexit, the Pound is still worth 10% less against the Euro and 12% less against the Dollar than it was on the eve of the poll.

“Such sustained Sterling weakness has driven up prices for all importers, but the behaviour of small and medium-sized businesses suggests they are feeling more pain than most.”

Looking more directly at SMEs in Sussex, Jonathan speculates over the impact closer to home: “A weak pound makes UK goods less costly to overseas purchasers, so Sussex exporters will benefit from their goods being cheaper to sell overseas.” He added: “A weak pound makes buying goods from overseas more expensive, which means manufacturers buying raw materials from overseas and supplying to a UK market will find life difficult versus manufacturers selling overseas. With a 15% movement lower on the pound on a trade weighted basis rising prices will be unavoidable in many areas for Sussex just like the rest of the UK.

What this news creates is further uncertainty, and this has an inevitably negative effect on all forms of business. Jonathan points out: “Generally speaking business flourishes where there is certainty. Where there is uncertainty, investment and spending in the economy is held back as consumers and business wait to see what happens.”

But as we well know, businesses often – if ever – have the luxury of waiting to see what happens; they want to know how their year is looking and they need to put a financial plan in place.

The research by FEXCO indicates that large companies and public sector organisations are much more likely to use hedging strategies when buying from overseas. David explained: “Products like forward contracts allow them to lock into a favourable exchange rate and protect themselves against adverse currency movements.”

However, as David points out: “Small firms that don’t hedge against this risk leave themselves open to costly dips in the Pound’s value. Our data shows they are trying to mitigate the risk by making smaller import purchases than they did at this time last year – but this bodes ill for their ability to grow.”

David advise firms to hedge against risk in whatever capacity they can, and to properly account for the volatility of currency markets.

Jonathan had his own advice for businesses in Sussex: “Business can tackle the uncertainty by making plans in advance and utilising contingency planning. Certain types of plan can mitigate the damage from the uncertainty. If companies are purchasing from overseas contracts which fix exchange rates, it will mean prices to consumers and other business are fixed well in advance to avoid shock price rises upsetting consumers and business. Business can also look to plan for the future by opening dialogue with suppliers and customers well in advance to discuss the issues that may arise.”

Ask the Expert: What are the strategies businesses can use to limit risk at such an uncertain time?

• Forward Contracts. With forward contracts, you buy a currency now with a small deposit – typically 5% – that enables you to lock into a specific rate. However, you only pay the remainder when you actually need the money. The fixed rate protects you from the potential for a sharp move against you when you eventually make the payment. Forward contracts can usually be fixed for up to a year.
• Limit Orders. This is where you set a target exchange rate, at which, if achieved in the markets, you will buy your currency. Limit Orders are useful if you have upcoming payments but you are not restricted by tight deadlines and therefore have time to try and achieve a better exchange rate than what’s available at the current time. This tool provides assurance to businesses that should the ultimate exchange rate be achieved, even if that occurs in the middle of the night, their trade will be triggered automatically.
• Stop Loss Orders. This is where you set a minimum exchange rate, which, if achieved in the markets, you will buy your currency. Stop Loss Orders are often used where there is a high risk or concern of adverse movement in exchange rates, enabling clients to protect their bottom line and reduce the risk of exposure to such negative movements.

For more information or advice, visit www.currencies.co.uk or www.fexco.com