After a relatively strong spring, wherein the pound sterling traded at a peak of $1.32 USD, its value has slowly sagged by nearly 6 per cent to $1.25 over the course of the summer. This has made life difficult for import businesses, who started the year confidently, expecting currency values to remain relatively stable. Retail businesses, for their part, are also forced to deal with sub-par growth as a result of impacts on consumers.
Of course, a weakening pound isn’t all bad news for businesses. Manufacturers and exporters who serve international markets normally benefit from weaker currencies. Moreover, it makes these businesses more attractive to foreign investors, who can get more for their money by investing while the pound is relatively cheap. By seizing the opportunity, these businesses grow more quickly and effectively, creating new jobs and helping consumers to recover, which helps to boost consumer spending growth. The current situation presents many businesses with an incredible growth opportunity that they can and should seize, though many are currently responding sluggishly.
Profit margins for importers are disappearing
Import businesses and UK retailers have faced a sharp drop in profits over the past several months. Importers, who are now forced to spend more pounds to purchase the same foreign goods as before, are increasingly left without any profits to show for their work. A natural response to increased import costs would, of course, be simply to raise prices. However, retailers and the end-consumers they sell to can’t afford to deal with a price increase.
Consumers can’t afford to increase spending
Consumers, like businesses, lose some of their buying power as their money decreases in value. The result is, of course, that they can’t afford to purchase the same quantity of products as before. According to the Office of National Statistics, sales growth over the three months to June was, at 0.7 per cent, less than half of the growth seen over the three months to May. This suggests some fragility, meaning that if importers were to raise their prices to boost profits, they risk a sharp drop in sales.
Political and global factors are holding back recovery
Traditionally, a weakening currency is a two-sided issue. While it impacts importers and consumers negatively, it also makes exporters much more competitive. Essentially, a weaker pound means UK labour and UK goods become relatively more affordable to businesses and consumers in other countries. Unfortunately, this hasn’t been the case. Instead of a spike in sales, the UK has actually suffered a sharp decline in sales growth, even as jobs growth and the manufacturing sector has similarly stalled.
The reason for this lack of adjustment by the economy is likely the result of political uncertainty and slowing global growth, rather than any structural economic barrier. According to the OECD, UK business confidence is now at its lowest level since 2011. While this isn’t good news, it’s important to note that it still only indicates a slightly pessimistic outlook. Businesses are currently still free to take advantage of the real opportunities offered by the UK’s currency situation.
How UK businesses can respond
With the pound almost matching its all-time low, reached in 2017, UK goods and services are more affordable and attractive internationally today than they have been at almost any other time. This makes it an excellent time for businesses to look to international markets and foreign investors to facilitate their growth.
Despite global economic challenges, top UK trading partners such as the United States, France, and Germany all represent large and growing markets for whom UK goods and services have suddenly become more affordable. Businesses that move aggressively to capitalise on this have a lot to gain. More importantly, doing so successfully is important for the UK economy as a whole.
Helping the economy recover
By pursuing growth in markets outside the UK, businesses can give consumers and more local businesses the boost they need to recover. They do this as a side effect of their own success, by expanding their operations, buying more from UK suppliers, hiring more workers, and, in doing so, injecting money into the UK economy. This, in turn, will help to accelerate domestic sales growth, giving UK businesses in general a stronger domestic market to work with.
While the UK has faced significant economic pressure in recent years, businesses have regardless maintained steady and uninterrupted growth. Despite ongoing global and political adversity, British businesses can, by pursuing their own growth and success, contribute to maintaining the country’s remarkable economic resilience.