Should the British people vote to leave, the impact of Brexit on the economy and for British businesses is a question that is currently vigorously debated. It would depend very much on the nature of the departure negotiation process between the UK and the EU. Let’s take a closer look.
What will be the impact of Brexit on pound sterling?
Since the June 23 referendum vote was announced, the pound has plummeted, losing 2% of its value against the dollar on its opening trading day, Monday February 22. Since then, it has fallen further to levels of 1.38, officially in line with historic crisis trading levels. Good news for exporters in the short term, but not so good if you’re an importer of goods or services.
If Brexit happens, it would likely lead to short-term upheaval for the embattled pound as a best case scenario. Investors run a mile from uncertainty so why would they invest in an economy with a currency at “crisis levels”, which is suddenly cut adrift from the single largest common market in the world?
Sterling after Brexit would likely plummet further in value against the major currencies of the world. The Bank of England would likely cut rates to zero, though Governor Mark Carney has ruled out going into negative territory.
A Bloomberg survey¹ saw 29 out of 35 economists predicting that a Brexit would see the pound tumble to $1.35. Seven of the surveyed economists believe it will plummet to below $1.20.
What sectors would be affected most by a Brexit?
10% of UK GDP comes from financial services. With warnings being issued seemingly on a daily basis from big business and banks that it will see a fragmentation of much of the City’s financial might across Europe and the world, the impact on financial services is worrisome. Such warnings have been dismissed out of hand by Leave campaigners, but such a reaction seems hasty.
Goldman Sachs has pumped £500,000 into the Britain Stronger in Europe campaign. Other big banks and businesses have followed suit, including JP Morgan, Bank of America, Vodafone and GlaxoSmithKline². Some have said that it would weaken London’s status as Europe’s financial capital and see a gradual outflow of trade to other European financial hubs.
Businesses who import from abroad – be it goods, equipment or services in any sector will feel the pinch of a weaker pound.
Should sterling fall to levels where it is seriously impacting your operations, it may be worth asking your suppliers to freeze your prices temporarily.
On the flipside, it is an opportunity to increase exports on the back of a cheap pound – if your company has been looking to expand operations overseas or into new markets, a cheaper pound will be more attractive to potential customers.
The Bank of England’s Main Worry For The UK Economy Over Brexit
The main worry for Mark Carney and co. is not a falling pound. A cheaper pound is a boon for exports after all. Carney’s main worry is the potential for Brexit to upset the ability of companies and households to pay higher interest rates on money borrowed from abroad³. And subsequently, the wider impact of Brexit on the economy as a result.
He did stress however that the UK economy is much more resilient and that the Bank of England will be prepared to withstand the negative effects of a Brexit.
How To Prepare Your Business For A Potential Brexit
- Evaluate your foreign exchange and international payments needs. Gauge the possible impact of the pound falling to $1.35 and even as low as $1.20. Don’t leave your company’s fortunes to chance.
- Speak to your currency provider and work out your needs and how to best cover your exposure with sound advice.
- Don’t be afraid of locking in a loss on the exchange rate – better to take a smaller loss now than risk a much greater loss down the road.
- Consider speaking to your foreign suppliers to renegotiate your pricing based on current economic circumstances. You are after all their loyal customer and given the situation, it is feasible. Either that or risk losing you or receiving a lower level of business.
- Consider shopping around for cheaper suppliers abroad or at home.
- Hedge your FX exposure risk with currency forward or options contracts. For exotic currencies, more sophisticated hedging products may be more appropriate.
We don’t believe Brexit is likely for a number of reasons. However, the threat is real. Leaving your business’ profit margins open to such risk is ill-advised.
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1 – Bloomberg Survey
2 – Banks Lead As Businesses Buy Into Pro-EU Campaign – The Financial Times
Photo of Big Ben – Yiannis Theologos Michellis
Photo of Jamie Dimon – Fortune Live Media