Keeping track with the pound’s performance
As the pound reached a 7-month high in May, what does this mean for the UK Economy as a whole and, more specifically, UK businesses?
Sterling’s efforts
It has been a rocky ride for the pound sterling over the last year. In July 2008, £1 would have bought you two dollars compared to just $1.35 in January (a 23-year low). That’s quite a hike in costs if your business relies on importing any of its goods or services from America (or anywhere else that trades in the ubiquitous buck). While it also makes goods cheaper to American customers, the worldwide recession has reduced demand to undermine the increased sales that might otherwise be expected.
But recently things have changed again. The pound was at a three month high of $ 1.61 in late May. Commentators believe this is due, in part, to investors leaving the traditional ‘safe haven’ of the U.S. currency and buying stocks and shares at a time when many believe U.K. economic recovery is just around the corner. Many also believe that the U.K. Government’s emergency actions, such as Quantative Easing, to tackle the global slowdown are starting to bear fruit.
In terms of the Euro, the pound has also experienced relative strength recently, culminating in a near-6-month high in late May. This seems to be due to a consensus on the currency markets that the UK is now better placed to weather the storm than its Eurozone counterparts. This is in no small part due to an expectation that the worst is yet to come for German financial institutions; while the UK has had most of its bad news.
While this makes British exports relatively more expensive once again, it also shows an increase in confidence in the U.K.’s economy on the worldwide stage. This seems to be backed-up in more tangible areas too - while UK manufacturing output fell in March, it did so by only 0.1%; that’s the lowest fall in over a year and invites a lot more optimism than the predicted 0.8% drop.
All in all then, the growing strength of the pound can be seen as an indicator of confidence in the economy. When coupled with other recent signs of the ‘green shoots’ of recovery such as modest house-price rises, it might hint that we’ve turned a corner. However, it’s more than just a barometer and can affect the fate of businesses by pushing up the cost of exports. For small businesses it all adds up to ‘hang on in there’. Or, in the words of Mr David Bloom at HSBC, “We now have more conviction that the combination of policy measures will, in time deliver, a sustainable recovery.”
