It will be sometime before the full implications of Brexit are known and we see exactly what a post-Brexit UK looks like, but the last fortnight has provided a glimpse of what is in store while that picture takes shape. While the politicians in Westminster work that out, the UK faces a protracted period of uncertainty that presents businesses with both opportunities and challenges.
One of the most immediate and obvious effects of the decision to leave the EU was seen in the currency markets. In the hours following the vote sterling dropped to 30-year lows against the dollar, falling by ten per cent. It also fell by 12 per cent against the yen and six per cent against the euro.
This is already making life difficult for importers, which are seeing the costs of the goods bought from overseas increase. Those companies that hedged currency exposure ahead of the referendum, to lock in a more favourable exchange rate, will have been able to weather the storm and have bought time to adjust to the new currency conditions. However, those that didn’t will already be looking at margins and contemplating the options available.
One thing businesses cannot afford to do is ignore the movement and wait for exchange rates to return to pre-Brexit levels. While this could happen, the technical data points to sterling heading even lower. Sentiment and politics currently outweigh the importance of economic data and, in an environment where we have a new prime minister, there is no unified opposition and a singular and coherent plan for Brexit is yet to materialise, the pound is likely to remain under pressure. Add to this indications from Bank of England governor Mark Carney that interest rates could go down and that further quantitative easing is back on the table in a bid to reassure financial markets, and the pound looks more likely to further test the historic lows we’ve seen against the dollar than mount a sustained rally – in the short term at least.
Firms reliant on selling into domestic markets are also likely to see tougher trading conditions as consumer confidence shows signs of weakening. The latest YouGov/Cebr Consumer Confidence Index showed a sharp decline since the vote, with confidence now at its lowest point since May 2013. Faced with so much uncertainty, people are growing increasingly concerned about their jobs and future economic wellbeing. As prices rise, we’re likely to see a reduction in non-essential expenditure and big-ticket purchases, putting further pressure on importers.
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The picture for exporters is better, as a weak sterling means products are essentially cheaper for foreign buyers while each are also continuing to trade as part of the single European market. Any new trade deals with Europe are likely to take a long time to come into effect, not least while the country rediscovers the art. The UK hasn’t negotiated its own trade deal since 1973 when it handed over responsibility to the EC and, with hundreds required for the task, one estimate puts the number of active trade negotiators in the UK at 20. The likelihood of any new trade deals being struck quickly with the EU and the countries it has trade deals with seems remote and until such times, possibly as late as the end of 2018, the UK looks set to trade under its existing rules.
However, exporters face their fair share of challenges too. Despite an unchanged trading situation in the short-term, there are longer-term question marks over the UK’s position in the world and international buyers will be weighing up the risks and uncertainty of dealing with a UK company against other possible options. We’ve already seen businesses lose out on contracts because of uncertainty about a future ability to deliver on commitments due to Brexit, while others entering into multi-year contracts have seen “Brexit clauses” written into them, to protect the client in the event that Brexit fundamentally alters commercial relationships.
Regardless of whether you’re an importer or an exporter, the Brexit vote is likely to impact how you do business. In the immediate term, this stems from the uncertainty it has thrown up. Rather than reacting in panic or sticking your head in the sand, the key is to be alive to the challenges that uncertainty and changing market conditions present, reassessing strategies and business plans to make sure they remain valid.
One of our clients, for example, has already switched from setting prices annually to reviewing pricing quarterly to enable flexibility against this backdrop of uncertainty. Firms should also look to gain certainty where they can. While a USD/GBP exchange rate at below $1.30 may not be as attractive as it was at $1.50 a fortnight ago, there is no evidence that it will return to those levels any time soon. Locking in a rate at below $1.30 against at least some of your commitments could be the sensible approach to protect revenues while the dust settles on the economic and political landscape.
Lucy Lillicrap is an FX risk management consultant at AFEX.
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