Inflation and the strength of the pound
Live GBP/EUR Forex chart
Below you’ll see a live update on the pound compared to the euro from TradingView. This is set to fluctuate throughout the Brexit negotiations.
How will the UK’s exit from the EU affect the value of the pound?
Immediately after the Brexit vote, there was a drastic devaluation in the pound, falling to the lowest point in 32 years ($1.2773 = £1) and it has suffered heavy losses ever since. Leading on from this, a “no deal” Brexit could see the pound fall in line with the Euro for the first time ever, and slump to 17% against the dollar. This could lead to the UK experiencing higher rates of inflation and weaker growth.
This would lead to a sharp drop in exports, business investment and confidence. According to Roger Hallam, currency chief investment officer at JPMorgan Asset Management, the UK may begin flirting with a recession.
The level of business investment is also expected by the Bank of England to be about 25% lower by 2019 thanks to Brexit.
Even though it looks bad currently, the UK pound has never suffered a crisis like the Euro has. The UK has never properly defaulted on its debt and will no longer be open to the inherent flaws of the Euro thanks to breaking our political, economic and financial structures.
How will this affect my business?
There could be higher costs to the value chain, currency stock markets may be affected and if your business is involved in direct imports and exports, you will have already seen a big currency effect.
There are certain industries that rely heavily on imports, so they will have the most dependants at risk from currency fluctuations. We’ve taken a look at them in more detail below.
“Assuming there is an economic ‘hit’ from Brexit, as seems likely, either taxes will need to rise or government spending will need to be cut (relative to what would have happened otherwise). Depending on the measures taken, we would expect businesses to be affected as a consequence.”Prof John Fender - Professor of Macro Economics, Birmingham Uni
The UK’s automotive industry produces an average of 1.6 million cars each year. A total of 77 percent are exported abroad, of which 58 percent are sent to EU countries.
The sector accounts for 7 percent of the UK.’s manufacturing output and is dominated by Boeing, Airbus and Rolls-Royce. Bombardier, GKN and Leonardo Helicopters are also major employers.
As of 2015, the UK pharma market employed 73,000. UK pharma exports to the rest of the EU were valued at around $15bn, and pharmaceutical products were one of the top 5 products most imported and exported across the Channel.
Financial services sector
The financial services sector employs more than 1 million people, and accounted for 6.5% of the value created in the UK economy in 2017. In 2016–17, HM Revenue and Customs attributed £27.3 billion of tax receipts to the banking sector.
Consumers may also start to spend less, use fewer services and cut out luxuries, affecting businesses and the economy as a whole in the process. However, if there is a drop in the euro or another country needs to be bailed out, there will be little effect on the UK.
What next steps should I take?
Keep an eye on the situation. Adjust your budgets and costs buffers in relation to currency fluctuation, especially if you often deal with imports and exports. It may be worth seeking advice on how to adequately prepare for the changes in the pound.