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Currency Volatility Compounding Cost Pressures for Many Businesses

The British Chambers of Commerce (BCC) last week released the results of its survey, in partnership with American Express, which finds the majority of businesses expect the fall in sterling to increase their costs.

The survey of over 1,300 businesses found that 63% of businesses expect their costs to increase in the next 12 months as a result of the devaluation in sterling, including a quarter (24%) who expect costs to rise significantly. In comparison, only 6% of firms expect their costs to decrease.

Over 70% of manufacturers (73%) and business-to-consumer firms (71%) anticipate costs increases, compared to 55% of business-to-business firms, according to the results.

The survey also found that many businesses trading abroad are leaving themselves exposed to currency fluctuations, with nearly half (46%) of UK firms not taking proactive steps to manage currency risk. Smaller firms are less likely than their larger counterparts to be managing risk (44% of firms with 1-9 employees, compared to 70% of those with 50-249). Manufacturers have the highest proportion of businesses managing currency risk (76%), compared to B2C (57%) and B2B (39%).

The findings of the survey highlight the extent to which the depreciation in sterling is expected to compound the price pressures on firms, underlining the need to ease the domestic cost of doing business. There is also a clear need for more support and information for exporting businesses on the importance of managing currency risk.

Other key findings in the survey are:

  • The most common forms of managing currency risk are invoicing in sterling (27%), opening foreign currency accounts (15%), and waiting for an advantageous rate and buying using the spot market (15%)
  • Less than a quarter (24%) of businesses say they have a complete understanding of the types of international payment methods available, with 23% saying somewhat and 13% none at all
  • The biggest challenges businesses face in making or receiving international payments are delays (21%), bad or misleading exchange rates (16%) and hidden fees (16%)

Dr Adam Marshall, Director General at the British Chambers of Commerce (BCC), said: “Weak sterling reflects the current climate of political uncertainty and lack of clarity on the Brexit process. A clear and firm strategy from government about the nature of the UK’s future trading relationship with the EU would go a long way to reassure and stabilise markets.

“While businesses await answers on Brexit, and a return to a stronger currency, they must take the necessary steps to prepare for potential risks. It’s concerning to see the proportion of UK companies not actively managing currency risk. For those trading internationally, it makes good business sense to explore the options available to insure against currency fluctuations.

“Companies are clearly feeling price pressure from the depreciation in sterling. The government made a crucial first step in the Budget with action on business rates, but further steps need to be taken on the upfront cost of doing business, so that firms can mitigate currency pressures and grow their business.”

Jaspaul Bains, FX Strategist at Black Country Chamber Patrons RationalFX, commented: “The pound’s volatility has had decidedly mixed results for businesses and the economy in the year and a half since the Brexit vote. Sterling’s volatility is perhaps symptomatic of the market uncertainty surrounding the UK’s future, with political factors significantly weighing on the currency. The past year has seen sentiment improve on just positive comments from politicians and market anticipation alone, as demonstrated by the speculation over BoE rate rises and more recently the Brexit bill figure. This highlights how the pound is not necessarily governed by the same drivers that affect its peers, and will continue to be the close focus for investors as the UK uncouples from the EU.

"Some analysts predicted that the fall in sterling would lead to a surge in exports, yet the actual figures have seldom proved impressive for the UK’s international trade as economic figures continue to signal that growth is slowing. However, despite the gloomy headlines, closer inspection of the how businesses have reacted in the West Midlands has shown that many businesses have indeed experienced a rise in export sales across a range of markets, highlighting how businesses can continue to attract customers from Europe and beyond.” 

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