New report sponsored by the British Ports Association challenges idea that a weak pound will lead to a boost in exports, because many of the materials used in UK manufacturing are imported from the EU and beyond.
A fluctuating post-Brexit pound Sterling will have differing impacts on exports, freight, and infrastructure investment, according to a new report sponsored by the British Ports Association (BPA), with the report challenging the popular idea that a weak pound will lead to a boost in exports.
Ports and the Decline in Value of the Pound, co-authored by Currency UK, considered the trajectory of Sterling versus the US dollar and the euro in the wake of the upcoming Brexit deadline when the UK leaves the European Union (EU) and the potential impact on various aspects of the British economy, relating to ports.
The report notes that despite a recurring theme of uncertainty, one thing likely to change as a result of currency fluctuations is the “complex purchasing patterns” of UK manufacturers and businesses, as well as international business streams and foreign investment in the UK.
On UK exports, the 10-page report finds that it is “perhaps an oversimplification” to say that a weak pound will lead to a boost in exports. Many of the materials used in UK manufacturing are imported from the EU and beyond, stated the report, adding that a lower exchange rate will make these components more expensive.
“This could result in UK manufacturers sourcing from domestic suppliers, which is good for UK businesses on one level but could, in turn, drive down the UK’s international trade, making shipping less efficient and more costly.”
The report said that the UK’s “strongly import-driven” economy means that any decreases in exchange rate values can increase the costs that businesses and consumers will have to manage.
Prior to the referendum vote, the pound bought roughly €1.32, whereas now the rate is sitting at around the €1.10-€1.14 to Sterling.
“For some traders, the currency fluctuations are more concerning than the prospect of new tariffs on physical trade,” the report noted. “While products such as cars manufactured in UK plants could be cheaper for those in the EU to buy, potential new tariffs of 10% of the value of such products could push prices up substantially.
“Also, as soon as the UK leaves the EU, car parts that are imported from other European countries could have tariff costs added to them. A key question is how much of a difference will new tariffs and non-tariff barriers make.”
For freight, the report sees a “possible exacerbation” of the HGV driver shortage as a weaker pound means it is “less lucrative for foreign drivers to work in the UK”. It highlighted that a “significant number” of lorry drivers in the UK are from European nations and with a dramatic drop in the value of the pound, versus the equivalent value in their home currencies, could be compounded by the UK being a “less attractive place to live for EU nationals generally,” as uncertainty over EU citizens’ continued right to work in the UK remains.
Regarding the energy industry, the report finds that as oil is traded in the US dollar “it will be less profitable to trade” when the pound is weaker in relation to the petrodollar.
However, investments in infrastructure are potentially more likely, with a lower value of Sterling, although “fluctuations in value and economic uncertainty are not necessarily attractive to foreign investors”.
A BPA last year found that there was £1.7 billion worth of port infrastructure development projects in the pipeline. Some of this will be provided by international investors who will take into consideration the strength of the pound compared to other currencies: “Therefore a lower value of the pound might make investments more likely”.
The report states that In November 2018 the Bank of England produced a study on EU withdrawal scenarios and monetary and financial stability. It estimated that a no-deal Brexit without a transition period could result in a 15% reduction in trade by 2023.
“While it is important to remember that this figure is a prediction based on a worst-case scenario, large fluctuations in exchange rates may follow,” stated the BPA-Currency UK report.
BPA chief executive Richard Ballantyne said: “It is pivotal that we understand what impact Brexit will have on UK trade, ports and currency – which is why we must explore contingencies of what may happen to the value of the British Pound, and the subsequent impact on trade and investment in ports.
“The British Pound has fluctuated significantly since the 2016 EU referendum, so it is important to consider the impact of this uncertainty, and whether UK ports will be better or worse off as a result; a vital consideration when we take account of the £9.7bn of value that the ports sector brings to the wider UK economy.
Alex Coates, director of operations at Currency UK, said: “How Britain will exit the EU remains clouded by uncertainty. This means that fluctuations in the value of pound on the international currency market continue to be a recurring theme.
“This can represent real opportunities for international investors and currency traders but can also create unpredictability for those in the shipping, freight and ports business, which facilitate 95% of the UK’s physical trade.”
Source: Lloyd’s
