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UK Economic Outlook (2017) & its impact on Sterling

Posted 26 July 2017 | Feed Icon | 0 Comments

Now that the UK’s GDP estimated growth figures for the first half of 2017 have been published, it is apparent that we’re experiencing an economic slowdown in 2017 versus 2016. Official figures from the Office for National Statistics estimate that the UK economy grew 0.3% in April to June 17, slightly up on the 0.2% growth seen in quarter one. This shows that the perhaps surprisingly strong economic growth witnessed immediately after the Brexit referendum has faltered significantly – the UK and Germany were the fastest growing economies in the G7 last year, but now we’re in the slow lane. Year-on-year growth has slowed from 2 percent to 1.7 percent. The International Monetary Fund (IMF) has recently revised downwards UK GDP growth for 2017 from 2.0 percent to 1.7 percent.

So why the slowdown? Well against the obvious back-drop of political and economic uncertainty caused by Brexit, and most recently, the unexpected failure of the Conservatives to secure an overall majority at the general election, it is widely predicted that the UK economy will experience less growth than would have otherwise been the case.

But we can add another dampening factor too, caused in part by Brexit – namely the recent uptick in inflation which has not been reflected in wage inflation, thereby hurting consumer spending. And weaker sterling against the major currencies since the Brexit vote has also caused import price inflation. Most economic commentators also remain concerned about the UK’s productivity gap versus the other major economies, with relatively weak investment in infrastructure and skills training. This is keeping a lid on wage inflation, as is the government’s resistance to growing calls to scrap the 1 percent public sector wage cap.

Most of the growth is coming from the services sector, which grew 0.5 percent in the last quarter (up from 0.1 percent in quarter one). But construction and manufacturing have contracted by 0.9 percent and 0.5 percent respectively.

With three quarters of the UK economy coming from household consumption, the slightly increased inflationary pressures rising faster than wages is dampening the growth forecast. This in turn will have a negative impact on businesses, many of whom are already dealing with a squeeze on margin, particularly if exposed to import prices, due to the ongoing weakness of sterling.

Expect the same in the second half of 2017

Growth in domestic consumption will only happen if businesses feel confident enough to increase wages. But it is difficult to see where this confidence will come from, given the dampening factors highlighted above – the weak pound, higher import prices, low investment in skills training, increased inflation and above all the continued lack of any certainty on how Brexit will be negotiated. Expect the UK to continue to under-perform against its major economic competitors.

How is sterling faring on the international trading markets?

The Bank of England Monetary Policy Committee (MPC) has recently voted yet again to keep interest rates at their historic low point. But the markets were taken by surprise by the fact that more members of the MPC voted for an interest rate rise than expected. Some commentators think that a rate rise may be on the cards in 2017 and this has slightly strengthened sterling in the last few days (as a rate rise would likely result in a surge in global investment funds, thereby increasing the value of sterling relative to other currencies). That said, most commentators expect the current weak position of sterling to remain stable over the next few months with nothing on the horizon expected to create a buying surge of sterling. Despite Article 50 being triggered four months ago, the markets still don’t see clarity surrounding the UK’s negotiating position and the threat of a no-deal remains. Until the market feels more certain (and positive) about the outcome of Brexit, and with the economy looking sluggish, it remains likely that sterling will mirror the weak economic position and remain weak for the remainder of 2017 and early 2018.

The only factors which may help to boost sterling, but perhaps not by a significant margin, might be external global events, such as a political shock in the US or EU caused by President Trump being impeached, say, or Merkel losing the German elections in September. Neither looks likely, but given the political turmoil experienced in the last couple of years, all bets are off. And that’s without considering China, North Korea….

How can my company protect itself against damaging foreign exchange movements?

With sterling remaining weak, increasing number of UK based companies are having to face increased import prices and reduced values of repatriated overseas revenues. This increased financial risk which needs to be mitigated. I cover some aspects of this in my previous blog relating to how procurement functions should react to the increased risks resulting from Brexit, in particular managing EU based suppliers. In terms of currency swings, a key start point is to understand not just what level of price needs to be obtained for a given product or service sale to be profitable, but also how this price level is impacted upon by currency fluctuations. Then evaluate the degree of risk the business is prepared to take in hedging that risk away, such as buying forward versus spot buying currency for example. This is where external currency specialists can help.

Which is where Buying Support Agency can now assist…

Given the currency market uncertainty, Buying Support Agency is delighted to announce the launch of two value for money services within the ‘Professional Services’ section of its BSA Buying Group.

The first is our sourcing of a multiple-award winning foreign exchange broker, meaning that members of BSA Buying Group can enjoy heavily discounted exchange rate charges, reduced still further thanks to BSA Buying Group’s buying power that could save your company money compared to your bank, with no hidden fees or charges.

Secondly, our BSA Buying Group members can now benefit from our partnership with the UK’s number one source of part-time Finance Directors. This makes it possible and practical for SME businesses to take on one of the UK’s leading Finance Directors on a part-time basis for a fraction of the cost of employing a full-time FD. These experts are well versed in successfully steering companies through volatile trading conditions, in securing funding and so forth.

For more information on either of these services, to find out how to join BSA Buying Group to access up to 24 areas of overhead cost, or to seek support in preparing your supply and procurement functions for the post-Brexit world, call 0800 254 0344 today.

Author: Matt Roper

(CEO, Buying Support Agency Ltd)

by M Roper | 26 July 2017