Sterling woes will hit our exporters where it hurts
Since the decision by the Bank of England, a couple of weeks back, to throw caution to the wind with an aggressive approach to interest rates and quantitative easing (QE), sterling has come under renewed pressure and this week went close to 87p against the euro.
This represents a currency adjustment of almost 25% since last November. This, effectively, means that somebody purchasing £1,000 today would have to pay €281 less than last November. This has the effect of making imports from the UK considerably cheaper and exports to the UK considerably more expensive.
From an import perspective, there is now every chance that we will see a significant increase in import penetration from the UK, which will have the effect of substituting for domestic goods. The food sector actually stands out in this regard, but others are also vulnerable. Stories of shoppers flocking to the North for food, drink, clothes and electrical goods purchases could become a reality over the coming months.
Very reminiscent of what happened back in 2008 and 2009. This did serious damage to the Irish retail sector and Irish food producers at that stage.
It is one thing to suggest that people should be patriotic and support Irish jobs and Irish businesses, but the bottom line for many people is that if they get the opportunity to make considerable currency-related savings, they will go for it.
To suggest that Irish retailers and manufacturers should adjust their prices downwards to offset the currency move just does not recognise business realities and the tight margins that persist in many businesses.
The global payments company, TransferMate suggested this week — based on the payments that it processes — that imports of used cars from the UK have increased by 60% since the Brexit vote at the end of June.
Of course, given that we don’t manufacture cars in this country, imported cars from the UK will not displace domestically-produced cars.
However, they will displace both new and second-hand cars sold by Irish dealers and, consequently, could threaten jobs in the sector and could undermine the Vat and VRT windfall that the exchequer has reaped from the strong growth in new car sales over the past three years.
The bottom line is that if current sterling exchange levels persist for a protracted period or get worse, the business model for many Irish businesses will be damaged and jobs will be lost. Ahead of Budget 2017, this should be remembered.
For example, it would be utter lunacy to reverse the 9% Vat rate that has applied in the hospitality sector since 2011. There have been some suggestions in recent times that it should be put back up to 13%. At a time when Irish tourism is potentially under threat from very adverse exchange rate movements and a sharp slowdown in our most important tourist source market, increasing the Vat rate would be akin to committing hari-kari.
Some people are deeply uncomfortable with any policy that is deemed to support or subsidise business, but these ideological blind spots need to be forgotten for the greater good.
The merchandise trade figures for June were released earlier this week and they also raise concerns about the impact sterling and the UK economy are starting to have on Ireland’s export performance.
Merchandise exports in the first half of the year were 1.2% higher than the first half of 2015. Exports to the UK were down by 5.1%; exports to the eurozone were down by 2.9%; and exports to the US increased by 11.9%.
Of concern has to be the fact that in the month of June, exports to the UK were 11.5% lower than June of last year. Exports do tend to be very volatile from month to month, but the trend in sales to the UK is a matter of concern. Against a background of a slowing British economy and a very significant currency movement, there are no real surprises in how this export relationship is developing.
Irish indigenous exports are most vulnerable and in framing Budget 2017, this must be top of the Government’s agenda. It is all well and good to focus on social expenditure increases, but if jobs were lost due to the UK situation, this would inevitably undermine the tax revenues that fund social expenditure.
