Since the Brexit vote on June 23rd this year, the sterling pound has shown a constant fluctuation, reaching a value of £1=$1,22 on October 27th, 2016. While some British consumers may be buying imported goods, British tourists purchasing holidays abroad, British businesses importing products from the rest of the world, foreign investors and foreign workers in the UK, may have been affected by the change in value of the British currency, others seem to have benefited from the economic environment created by the shifting course of the pound.
While foreign goods may become more expensive in the UK, thus impacting importers, the current pound value may help British exporters by making their goods more affordable and therefore more attractive to foreign buyers. On October 18th, 2016, the British fashion retailer Burberry reported a revenue of £1,159m for the first half of the year, compared with £1,105 during the same period in 2015. The report indicates a boost in sales abroad, as well as a hike in domestic sales linked to an increase in fashion tourism, particularly from countries like China and the US, induced by a growing buying power in the UK. Referring to the company’s business perspectives, Christopher Bailey, Chief Creative and Chief Executive Officer, commented: “We remain on track to deliver our financial goals.”
A favourable currency exchange rate may open the possibility of an increased number of foreign tourists visiting the UK, provided foreign currencies remain competitive versus the pound. At the same time, some Britons may prefer a vacation in the UK rather than travelling abroad, increasing domestic holiday sales and holiday-related services and products. In direct correlation with the number of Britons travelling outside of the UK, airline sales may also be affected. However, a potential growth in inbound travel may balance the total sales.
In the recent context of Netherlands-based company Unilever seeking to raise prices on a number of products, including a British-favourite, Marmite, sold by Tesco – British-made products may become more attractive for domestic consumers. This, in turn, may boost the British economy and create jobs internally. The recent currency developments may also help improve the UK’s trade balance, as exports may grow relatively more attractive than imports. The current value of the pound may reduce the deficit by making exports more competitive while scaling down the demand for imports.
Other market players who may benefit from the current value of the pound may be foreign investors who purchase British assets, such as real estate, as well as British firms who earn profits abroad, such as British investors, or British businesses who may be able to shift from selling to the domestic market to selling aboard, thus benefiting from more competitive exports.
A decisive element in the post-Brexit economic environment is whether the pound’s current course is temporary or long term. Businesses as well as individuals may need certainty in order to plan ahead and make educated financial decisions. For example, if the foreign demand for British goods proves to increase and may be sustained, the British firms producing these goods may have the opportunity of expanding and growing their businesses abroad. While the UK and the European Union are yet to agree on the terms of Brexit, it may be prudent to approach investments and money related matters in a conservative manner while the situation gets clarified.
What policies may the government implement to stabilise the value of the pound?