By Karen Landles
Our economic trends since Brexit have been better than expected. Consumers are spending, seemingly fed up of austerity. So why then is the market holding back, showing such uncertainty? Since Brexit we have seen a falling pound, a resilient pound, a Pound fighting back. From the time results started to come through on the night of the referendum sterling has come under pressure, falling 10% in the immediate aftermath. The markets who bet on the economy are betting against. Economic theory tells us that a lower rate of exchange will aid exports, and thus our manufacturing, but this is not the whole picture. Our fluctuating Pound is not part of a carefully thought out economic strategy; the weakened state of the Pound is an indication of just how anxious investors are about the future of our economy.
If we have a weaker pound, we are told, then exporting becomes easier as our relative prices overseas comes down, but that doesn’t chime with reality on the ground. According to the CBI, assessing the market in October 2016, the majority of exporting manufacturing firms said that “the fall in the Pound since June had a negative impact on their business”. In a supplementary question, 47% of manufacturing firms cited sterling’s depreciation as having a negative impact, against 32% citing a positive impact.
What we are seeing is that it costs us more to buy raw material. I was talking just this week with a business structuring expert who told me of a small manufacturer of high quality chocolate who has seen the cost of raw materials rocket by 15%. That is a hefty increase to hope to make back selling abroad and it also hits the domestic market hard. And it isn’t just a threat to SMEs, Rain Newton-Smith, CBI Chief Economist, said:
“Manufacturers are optimistic about export prospects and export orders are growing, following the fall in Sterling. However, the weaker Pound is also feeding through to costs, which are rising briskly and may well spill over into higher consumer prices in the months ahead”.
A weaker Pound, an indication of a weakened economy, is a threat to our exports and our domestic market – I can barely bring myself to address the higher costs of prosecco.
I am leaving aside the question of exactly who we expect to be exporting to in the near future with the complications of additional tariffs, since it isn’t part of this debate, but it is worth mentioning since it is the fear of Brexit that is at the heart of the current problem. I don’t see Nissan confident about its future here, or the future of the 7,000 employees in Sunderland, despite the falling pound. The weak Pound is a symptom of the deeper problem as well as causing problems of its own.
These rising costs of course are not just for manufacturers. The CBI economist talked about increases spilling over, a fear echoed by Mark Carney who this month warned that living costs are expected to rise and consumption costs outpace earnings growth.
Brexit has been an act of self-harm; a weakened Pound feels a bit like medieval bloodletting with an already fragile patient rather than a thought through strategy for healing our economy.