FIRST OF ALL, a recap. As we are only too aware the government is still taking the austerity route, leaving it to the Bank of England (BoE) to come up with a recovery plan for growth. Since 2009, their policy has been to weaken the pound with the goal of bringing about an export led recovery in the UK. To that end, for over four years now, interest rates have been held at 0.5%, and quantitative easing has ensured a £375bn increase in the money supply.
The cheaper sterling theoretically makes British exports a more attractive proposition. From here increased export sales should follow, helping to kick start growth in the UK economy. However, the problem is that many of the other central banks in the developed world have followed suit, also cheapening their currencies to make their exports more competitive. These are the so called ‘currency wars’, that we’ve heard so much about. And thousands of SMEs in the UK are going into battle every day because, as the pound weakens, import costs rise, and as net importers the majority of SMEs are being hit hard.
As a currency service provider, we speak to thousands of businesses here in the UK and the overwhelming sense I’ve been getting when speaking to FDs, MDs and CEOs at these companies is that they’re not happy with this export focussed strategy. SMEs have often been referred to as the lifeblood of the British economy, but as far as I can tell as net importers, these businesses have largely been ignored by the government as it tries to export the economy back to health.
And what is disappointing, is that the plan doesn’t seem to be working. Despite sterling being cheaper by a fifth compared to five years ago, exports have increased only marginally, as companies take advantage of a cheaper pound to boost profit margins, rather than reinvesting.
In trying to improve the fortunes of the UK economy by taking such measures, you could argue that the powers that be are actually harming the core of British business. It’s no surprise then that there is such a huge sense of dissatisfaction within the business community regarding the on-going situation with a falling pound, and how rising import costs are adding pressure to what is already a difficult trading environment for everyone.
So, will it change any time soon? With Mark Carney having just got his feet under his new desk on Threadneedle Street, it will be interesting to see whether this loose monetary policy will continue. It remains to be seen whether SMEs will see more pressure piled on to them via rising import costs in the next few months, and questions will be asked about how far the pound could fall. If it falls much further, domestic inflation could get worse, and as incomes fall in real terms, growth will continue to shrink. There is some talk that, for the first time in five years, the pound could soon be on a par with the euro.
For Carney and the BoE, they must decide whether to keep their nerve, steadfast in their belief that measures to purposely weaken the pound will eventually have the desired effect on the UK economy. Or they can swallow their pride, change tack, and abandon this path completely. If they choose the former, and remain embroiled in a currency war, perhaps they will find other ways of channelling money towards SMEs, not least ensuring that small enterprises can borrow more.
However, there is also a question mark over whether SMEs are doing everything in their power to protect themselves from the fallout of the currency wars. Fewer than a fifth of businesses have contracts defending them from the unpredictability of the markets beyond the next month, and just one in ten have taken action that safeguards them beyond the next six months. So if you’re in the 83% of financial directors who are just hoping it blows over, maybe it’s time you started to make some concerted plans.
In the meantime, the ‘currency wars’ look set to continue, and anyone who is involved in managing international payments of any kind would be well advised to start looking at currency matters more strategically in the months and years ahead. Take a look at the options available to you. You could choose a ‘currency option’, and give yourself piece of mind by fixing a worst case rate, yet still benefit if the rate moves in your favour. Despite some misconceptions, such products are accessible to everyone in business, not just big business.
Dramatic fluctuations can mean big losses, so you should take some time out to check out the options. Because, let’s face it, it doesn’t look like anything’s going to change anytime soon and it is the SMEs who are going to have carry the burden of the prevailing export-led strategy.
Alex Sullivan is managing director of World First UK