Falling pound: Should we frolic or freak out? – London Loves Business

The pound continued its slide against the Euro last month hitting 13-month lows last week, despite the ongoing turbulence in the Europe.

The pound has kept falling, even as the stock markets have carried on rallying and FTSE 100 companies been performing well. But why? And more importantly how is this going to impact British businesses?  

The SME view

The Currency Cloud, is a London-based cross-border payments service for businesses. So it is not just an SME looking out for its own interest, but for those of other small businesses too…

Harry Geller, senior FX manager at The Currency Cloud predicts that the falling currency means companies should keep playing it safe.

“The exchange rate environment for SMEs is still quite favourable,” says Geller.

“But we always encourage SMEs to hedge their currency risks, and book as much of their exposure on forward contracts as possible. Companies do lose the opportunity to take advantage should the market recover, but in this economic climate, it is better to be safe than sorry.”

And, while there are embryonic shoots of recovery in Europe, Geller sees various obstacles up ahead.

“So far, the weaker pound has not had a major impact in aiding the UK’s economic recovery and, as long as the Eurozone is caught in recession, this is likely to continue,” he says.

“…But scorned by the UK’s potential decision to tear up its agreement with the EU, we could see a lot of the bigger members of the single currency shunning trade partners in the UK. 

“The concern is that the UK may be slowly marginalised from the EU decision-making process and, as the Eurozone become more integrated, London will find itself on the periphery rather than at the centre of key financial markets.”

And there is no hope of a weak pound helping the UK trade itself out of that position, says Geller.

“Naturally, a weak pound increases the attractiveness of UK exports. However, we tend to see a major boost of exports following long term sustained weakness rather than the relatively short term movements of recent months,” he says. “In addition, in recent years there has been a move towards higher value premium exports which are less price sensitive. So while we are likely to see a slight increase in the volume of exports, don’t expect any miracles!”

The corporate view

Spring Partnerships is a financial consultancy that works with giants like Disney, Carlsberg and GE Healthcare.

Spring Partnership director Stephen Archer is excited about the prospect of a weakening pound.

“Overall a weak pound could be good for the UK, the pound has been on the point of being too strong for the past 12 months and some loss of rate will help our exports and compensate more than enough for the rise in import costs and any minor inflation that may accompany this change,” says Archer.

“I think the pound will continue to slip – maybe to Euros 1.17 and $1.55.”

But inflation might way prove tricky, he explains.

“Inflation might rise although only very slightly. Energy costs are the biggest threat, as are some food imports, but a small rise in inflation will not be detrimental and could further improve our competitiveness.”

ADVFN is an online platform dedicated to listing the performance of all FTSE companies.

ADVFN’s CEO Clem Chambers isn’t sure why the pound is falling but is weary of the consequences.  

“There are two theories. The first is the new Canadian Bank of England Governor, Mark Carney will bring US style QE to the UK and turbocharge the printing presses – devaluating the pound. The second is that huge Euro hedges protecting entities like the sovereign wealth funds of China and the Middle East are being unwound driving the hedging currencies down, with the euro rising,” says Chambers.

“Some people just think it is because the UK is in a mess but this is the least likely reason.”

Whatever the cause though, Chambers does not think the trend is positive.

“The UK’s manufacturing base is so weak that a falling pound won’t help it much. This is why the crash of sterling in 2008 didn’t help much – there wasn’t much to help.

“UK engineers rocketed in value on the stock market and boomed, so the theory is correct but there is sadly just not of scale of businesses in the UK to take advantage of this.”

The UK must therefore tread carefully in its talks with Europe, insists Chambers.

“A Brexit, which is a real possibility, would roil the market. The final outcome might not be a weakening pound but anything could happen and sterling’s weakness would then come from uncertainty and volatility, not the long term prospects of an independent UK.”

The academic view

Dianne Ramdeen, senior finance and economics lecturer at LCA Business School worries that the expected export boost will not offset the harm done to imports by a weakening pound.

“A weak pound will have a favourable effect on exports, however, imports will become more expensive,” says Ramdeen. “Those who buy Italian clothing and French wine will most certainly feel the squeeze. Travelling to Europe will be more costly than before as pounds will buy fewer euros. UK companies repatriating profits from foreign branches or subsidiaries will also suffer exchange losses.”

Weakening pound or not, most British companies will still find goods cheaper abroad, she insists.

“…Even though imports become more expensive, most companies would discover that buying abroad is still cheaper than locally produced goods, so manufacturers may not necessarily experience the boost that most are anticipating.”

The best way to avoid further depreciation would be to stop the anti-EU rhetoric and hope that ratings agencies do not downgrade the UK as feared, explains Ramdeen. 

The pound stayed strong in 2011 because “the UK was seen as the safe haven throughout most of the European debt crisis and the British government persisted with their program of QE (pumping money into the economy to stimulate growth),” says Ramdeen.

“So what caused this sudden and drastic deterioration of the pound? One clear reason is the possibility that the UK may lose its AAA rating and also the uncertainties about Britain’s disengagement from the EU.

“A lower rating would see the UK’s cost of borrowing rise significantly and dampen any prospects of investment and economic growth,” she adds.