Sterling’s slump since Britain voted to leave the EU continues to be a major conundrum for Ireland’s exporters.
Despite the positive July retail sales growth, employment growth and inflation figures from the UK last week, the fact remains that sterling has lost around 12% of its value against the euro since June 23, changing hands at its lowest rate since the dark days of the recession back in 2011.
The importance of the UK market to Irish exporters was evident in the half year trade figures released last week by the Central Statistics office. It remains our third largest market and cannot be easily replaced.
Agri-food and manufactured goods exports to the UK fell marginally in the lead up to the Brexit referendum in June, but still provided sales of €7bn for the first six months, while exports of services was an estimated €9bn.
The dilemma for Ireland’s exporters is that in repeating these sales in the second half of the year at the lower value of sterling will see most businesses trading at a loss. Effectively the 12% depreciation of sterling will wipe out the profit margin for most Irish exporters.
The hard choice is between pushing through price increases to their UK customers to offset the currency loss and risk losing market share, or take the loss in the short term and hope for a return to a stronger UK currency in the not too distant future.
There is a third option: To relocate the business to the UK.
Particularly exposed are the wide range of agri-food companies who ship 52% of all Irish beef exports, 60% of cheese exports, 70% of prepared consumer food exports and 84% of poultry exports, to the UK.
Large exporters to the UK such the Kerry Group, Glanbia, ABP and, and Dawn Farms, have options to shift production to their UK facilities.
At the recent Kerry Group results presentation, chief executive Stan McCarthy indicated how they may handle Brexit issues, saying “there are some investments that we will have to reconsider, that we would have made here in Ireland that we may have to make in the UK, depending on how it looks with regards to trade agreements”.
It may be impossible, however, for small Irish companies to shift production.
However, much still depends on the shape of the exit deal the UK negotiates. In the meantime, the task of trying to anticipate the outcome and its effects on business and the economy will demand some tough decisions.
Bank of England governor Mark Carney could have been speaking for all of us when he said this month that “some of the adjustments to this new reality may prove difficult and many will take time”.
Perhaps the governor was being tactical rather than strategic, focusing on kick-starting the falling sales of UK exporters, who according to Eurostat figures also released last week, show UK export sales slumped 11% over the January to June period.
He will be well aware that a weaker sterling should give a boost to UK exports but opens the door to higher import costs and inflation.
The figures show the UK market rebounded strongly since the Brexit vote, but the worst thing for Ireland’s exporters is complacency. More aftershocks could be on their way.
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