Recent months have seen the pound’s worth tumble to record lows as Brexit negotiations commence, with some analysts warning the worst may be yet to come. Touch investigates what this troubling trend means for UK businesses in Q4 2017 and beyond, as well as how related financial concerns such as rising inflation and the Bank of England’s interest rates debate could come to influence the GBP situation.
What is the current state of GBP and will its difficulties subside anytime soon?
As August came to an end, the UK’s central currency underwent a major change in circumstances, one of almost record-breaking proportions. The Independent reported how the pound began “hovering near an eight-year low against the euro” on August 31st, as those attempting to exchange their sterling received just €1.07-1.08 in return, amounts which the newspaper noted as veering disturbingly close to GBP’s lowest worth since 2009. Worse still, the pound plummeted 0.4% below the US dollar that day, hitting the undesirable level of $1.29.
The troubling figures came at a time of ongoing economic volatility for the country, what with UK inflation rising well above the Bank of England’s 2% target to 2.6% in July, and the Bank resultantly contemplating raising its interest rate in order to help stabilise national finances in the months and years ahead – more on which later. While the aforementioned shift in inflation involved a number of contributory factors such as declining fuel prices and rising costs of food and utilities, most economists concur that uncertainty surrounding the UK government and European Union’s continued Brexit negotiations has had the greatest impact on GBP.
With the UK’s chief negotiators assuring us that “concrete” progress has been made in Brussels but the EU’s representatives claiming otherwise, it’s therefore challenging to say the least to predict whether these GBP to euro exchange rate issues are mere bumps into the road to a post-Brexit economic recovery for the UK or foreboding signs of what’s to come. US investment bank Morgan Stanley appears less than optimistic on this front at present, its analysts warning that one British pound could fall below the worth of one euro as soon as early 2018, a downsurge which would bring sterling to its lowest ever value if such forecasts prove accurate.
Other financial institutions and experts are divided as to the immediate – or distant – fate of GBP, however. Some of the analysts surveyed by the BBC this month believe the pound could continue to tumble further over the course of 2018, potentially reaching an average value of 96 euro cents and $1.25 come the final quarter of next year. But EY ITEM Club chief economic adviser Howard Archer doubts the Bank of England will react hastily in terms of shifting their base rate, estimating that the next rate increase – which would surely have a noteworthy effect on the pound’s value against the euro – may not arrive until late 2018 or early 2019.
How could the pound’s freefall affect your business?
Less of an unknown quantity than the future value of GBP are the effects such declines can tend to have on British small- and medium-sized enterprises (SMEs) and larger businesses alike. As The Telegraph’s Szu Ping Chan outlines, “a weaker pound […] means UK businesses have to pay more for goods they buy in foreign currencies, making imports more expensive” for factories and other sectors reliant on international products while in the process potentially “fuel[ling] domestic inflation”.
On the bright side, though, weaker levels of GBP can equally yield tangible benefits – at least in the short-term – for those domestic firms involved in exporting goods, since international buyers will doubtless take advantage of the resultantly lowered costs of UK products and services by investing in these goods moreso than ever before. Case in point: the EEF’s Q3 2017 survey found that surging export demand boosted domestic manufacturing output and orders to record levels in June-August, while another survey by ECI Partners revealed 70% of the 350 UK firms polled intended to continue selling overseas despite Brexit turbulence going forward.
But with the pound’s spiralling value having had a marked impact upon national inflation, with fears that consumer price inflation could rise as high as 3% by year’s end, the Bank of England may soon raise UK interest rates to counteract this trend. In the 1990s, traditionally the Bank’s base rate fell between 5-13%, but with the recession came a substantial shift to the status quo as its level dropped from 5.75% in July 2007 to 0.5% in March 2009 then further to 0.25% last year. Should the Bank choose to pursue this interest rate rise – a move for which multiple members of its monetary policy committee have voted in recent meetings – this would likely up the price of certain UK goods, benefitting their sellers but of course hampering those domestic firms reliant on the materials to provide their services.
Speaking of the UK’s financial institutions, local firms’ access to traditional banking facilities may also soon take a turn for the worse if an August study conducted by Reuters is any indication. The international news organisation estimates that a record-breaking 762 UK bank branches will close down in 2017, a substantial increase on 2016’s 583 shutdowns and one which would bring the total number of branches across the country down to 8,000, compared to around 18,000 in the late 1980s. Most major banks offer easily navigable websites nowadays, but this could mean lower availability of local staff with expert knowledge of how firms based in smaller, more remote regions operate and their criteria for loans or other funding services.
How can your business prepare for the road ahead?
This is where Touch Financial comes in. While we can’t profess to know whether the Bank of England will change interest rates in the near or distant future, we’re here to help any firms concerned about the uncertain future of the UK economy – and thus their finances – find the ideal funding solution to restore their confidence no matter what comes next.
An invoice finance facility can enable firms worried about generating working capital to receive a pre-arranged advance percentage of their invoices’ value, meaning companies normally forced to wait 60-90 days to receive payment from their customers can access a high proportion of these funds, often within as little as 24 hours of invoices being raised. For those companies looking to take advantage of the high export demand due to the pound’s low value, this can be a particularly beneficial support mechanism, ensuring firms can buy materials from suppliers and begin sending them to international buyers as soon as possible, thereby capitalising on the weakened levels of GBP rather than missing the opportunity altogether.
Get in touch today to find out how our consultants can help you select from our panel of over 30 different esteemed funders, locating the one best suited to meet your company’s scope and requirements with an appropriate invoice finance facility. Be sure to also visit our import / export and trade finance pages for more information on how we can help in these specific areas.