22/06/17

Brexit One Year On: Keep Calm and Hedge The Pound

Bloomberg -- When Britons voted to leave the European Union a year ago, the managing director of PP Control & Automation, which makes electrical-control systems, was devastated.

The feeling didn’t last long. The company broke ground mere weeks after the vote on a project to increase its production space in the West Midlands. It’s part of a plan to double sales over the next four years and push into more markets. “I’ve been amazed so far by the reaction and the resilience, the grit and determination,” said Tony Hague, PP’s managing director. “When our back’s against the wall, it’s like the British bulldog spirit suddenly appears. And long may it continue, because I think we’re going to need it over the next few years.”

That determination is helping support the U.K. economy as Brexit proves to be a drawn-out affair. Exit talks only kicked off this week, and the U.K. has just until March 2019 to secure a deal with the bloc. Prime Minister Theresa May, whose two-year program was announced in Parliament on Wednesday by Queen Elizabeth II, will have to juggle opposition from all sides as her minority government tries to pass laws to implement the divorce.

Against that backdrop, many firms are continuing with expansion plans, cutting costs and managing a weakening currency. Their actions, along with rampant consumer spending in late 2016, helped the economy to confound forecasts of a sharp slowdown following the June 23 referendum.

Exporters also are still enjoying free and direct access to the EU’s single market of 500 million consumers. The Bank of England said Wednesday that weaker sterling and strong global growth are supporting manufacturing and overseas sales.

That boost will probably come to an end under May’s Brexit vision, and most economists agree there will ultimately be negative economic impacts from potential tariffs, less migration and lower investment.

Some damage is being felt already. While the pound’s 15 percent fall since the referendum has helped exports, it’s also boosted costs and led to inflation that’s given even the apparently unflappable British consumer reason to pause. Having been among the fastest-growing economies in the Group of Seven in 2016, the U.K. recently slipped to the bottom.

BOE Governor Mark Carney decided to speak out about Brexit this week, after being lambasted in 2016 for wading into politics. In his warning, he said that it’s not clear how the economy will react to the “reality of Brexit negotiations” and that firms “on either side of the channel may soon need to activate contingency plans.”

Some already are. John Mills Ltd., a consumer products company known for its JML-branded infomercials, had to raise the prices of a few products, but also renegotiated contracts with suppliers to keep them down. What it loses in margin, it’s so far been making up for in volume, said CEO Ken Daly.

“Necessity is the mother of invention. We’ve been working really hard to mitigate the effects of the devaluation and we’ve been successful,” he said from Chiswick, West London. “I suspect there’s a lot of businesses like ours that have been forced to look at their supply chains.”

Britain’s retailers have felt the pain of Brexit more than most. That’s because the currency-driven acceleration in inflation has coincided with tepid wage growth, undermining consumer purchasing power. The John Lewis department-store chain has seen sales growth of 0.8 percent so far this year, down from more than 6 percent a year earlier. The U.K.’s FTSE-350 index of retail stocks has fallen by 3 percent in the past year, underperforming a 20 percent gain in the broader measure.

Share plunge

Some larger retailers have running room: Tesco, the U.K.’s biggest supermarket, has used its vast buying power to resist cost pressure and raise prices less than competitors. Furniture retailer DFS, on the other hand, saw its shares plunge by the most ever last week after warning of market-wide conditions deteriorating.

With consumer spending accounting for 60 percent of the economy, overall growth dropped to 0.2 percent in the first quarter and, according to a monthly estimate, has shown little sign of pickup since then. The Bloomberg Brexit Barometer, designed to track the impact of the separation, has fallen sharply since the end of April as the economic cracks have appeared.

© Bloomberg