For the first time since 2009, the UK is teetering in recession as the cost-of-living crisis worsens and the pound continues to decline. But what does that really mean and how will it impact businesses?
How is currency valued?
Currency is valued based on a number of factors but essentially comes down to supply and demand, which are influenced by interest rates, capital flow and inflation.
Interest rates – The currencies of countries offering higher interest rates generally increase in value. This is due to the fact that fixed-income investors swarm to higher interest rates which ultimately increases the demand and value of the currency.
Capital flow – Essentially, a high amount of capital inflow going into a country will appreciate the currency, whereas outflow will have the opposite effect. To put it simply, cash flow plays a huge part in the demand for currency.
Inflation – Inflation is a term used to describe increasing prices and how quickly they rise is known as ‘the rate of inflation’. High inflation damages the purchasing power of currency and increases the costs of goods. Countries with high inflation are likely to face a decreased demand for currency and it’ll therefore lose value.
Why is the pound fluctuating?
For years, the pound has been in a slow decline but in recent months, it has dived to a worrying low. Some of the biggest factors are the instability within the government, the announcement of tax cuts and the rise in National Insurance. Another major factor is the support packages offered during covid which forced the government to borrow more than $300 billion to support the public. The public and businesses are being asked to pick up the bill, simply worsening the cost of living crisis. All of these factors, combined with the death of the Queen, the war in Ukraine and Brexit have forced the pound to a record low.
What does it mean for UK businesses that import and export?
Believe it or not, it’s not bad news for all – some UK businesses who export overseas will actually benefit from the declining pound.
As the value of the pound declines, goods become cheaper for foreign buyers. This means sales are likely to increase as products become more affordable to overseas markets.
Similarly, 70% of revenue from the companies in the FTSE 100 comes from overseas. When the pound declines in value, dollar earnings buy more pounds, making revenue more valuable when exchanged back to sterling.
On the other end of the spectrum, businesses and manufacturers importing from overseas will suffer from decreased purchasing power. Considering the UK imports more than it exports, the weaker pound will push inflation by making goods more expensive for consumers and companies, which is likely to impact sales on both ends.
It may increase tourism
For brits travelling abroad, the weaker pound means their money won’t stretch as far as it once did. But foreign tourists, especially those venturing from the US and Asia, will benefit from better exchange rates.
Recently, a Singaporian travel firm has reported a 30% increase in searches for trips to the UK. Just one of the countries with increased interest in Britain, a wave of tourism will provide billions of pounds to the economy and to businesses through the sales of products.
Ultimately, the sinking sterling will make UK retail costs cheaper for tourists using currencies against which the pound has dropped, and may attract international interest for foreigners seeking deals on luxury items such as designer handbags and shoes.
It makes products more expensive
Unfortunately, businesses that export products from abroad are facing a losing battle when it comes to the price of their products. Whilst raw materials cost more to outsource, many companies are forced to up their prices to support the additional costs but it could drive away business as a result.
In the UK, we’re facing the worst cost-of-living crisis we’ve had in decades. Energy prices are skyrocketing, food and household products are more expensive and mortgage/rent payments are rising at an alarming rate. People fear losing their homes and struggling to feed their families.
Even for the most successful businesses, this will have a staggering impact on sales. According to a report posted by SME Insights, around 70% of businesses in the UK are considering raising their prices, a figure that is set to rise by 2023.
But how will consumers keep up with these costs when they’re barely staying afloat as it is?
If surging costs are affecting your business and you need advice on how to combat this, book a consultancy session with Matt today!