Falling pound puts more pressure on UK businesses under pressure

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(Bloomberg) – The slump in the pound is forcing UK businesses to raise prices, amplifying pressure from rising energy bills, rising raw material costs and a tight labor market.

Importers are among the hardest hit. Almost half of the food on supermarket shelves comes from overseas, according to the British Retail Consortium, and sourcing could become more expensive due to the weaker currency. It is even worse for the non-food sectors, where imported goods sometimes represent an even larger share of sales.

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« Any rapid decline in the pound, while helping exporters, will be alarming for all businesses because of the sense of instability it creates, » said Kitty Ussher, chief economist at the Institute of Directors.

The pound’s fall to an all-time low came in the wake of the new government’s tax-cutting budget, which is aimed at boosting growth. Yet further price increases could put pressure on households and businesses already struggling with high inflation and soaring borrowing costs.

For UK-based companies, the effects are mixed. Travel and tourism businesses could be boosted by a weaker pound as Americans flock to Britain after two years of Covid-related restrictions.

The higher rates

For multinational companies based in the UK, a weaker pound also means that profits from overseas operations result in a greater share of the UK currency.

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Still, any positive effect may be offset by higher borrowing costs if the Bank of England raises interest rates further to try to stem the fall. The BOE said on Monday it would assess the fall in the pound sterling at its next scheduled meeting and would not hesitate to change rates as necessary.

EasyJet Plc said the weaker pound would inflate its costs, although the British airline’s hedge positions on jet fuel and currency swings should provide some protection.

For small businesses based in the UK that depend on imports, the falling currency could be more problematic.

« It’s a nightmare, » said Roy Kendall, managing director of Top of the Range, a Yorkshire-based sportswear retailer including for the military, speaking of soaring import costs to all levels.

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His company is partly insulated from the sharp devaluation thanks to a years-long strategy of securing the stock more in advance. Still, Kendall sees the fall in the pound affecting cash flow, costs and wages going forward.

United Kingdom

Top of the Range is also looking to shift more of its business to UK manufacturers to reduce their exposure to goods priced in foreign currencies. While around 10% of its products come from UK suppliers, Kendall aims to triple that share by the end of this year.

A rapidly weakening pound also hits people like consultants who have to adjust their rates to serve clients around the world. Take Howard Turner, currently based on the Franco-Spanish border, who designs recording studios for individuals and institutions in the UK and Europe. It plans to revise its rate card in the coming days for the first time since the aftermath of the Brexit vote in 2017, when it assumed a conversion rate of around 1.25 euros per pound. As of late Monday, the rate was 1.11.

The fall of the pound now means that these prices are much lower for UK customers, compared to those paying in euros. If the pound reaches parity with the euro, he might have to raise the price of the pound by around 25%.

« I’m in a situation where I might end up having to say to UK customers – well, why don’t you pay me in euros? » said Turner.