Weakened Pound: What Does It Mean For Your Business?
Although there is a silver lining ...
Posted by Roger Eddowes on 03/10/2022 @ 8:00AM
Last week, the pound hit a new low against the dollar after Chancellor Kwasi Kwarteng pledged to cut taxes. Worries about higher interest rates then knocked investors' confidence quite dramatically ...
With a weakened pound, inflation and interest rates rise! But there is a silver lining for some businesses!
The exchange rate got down to $1.07 to the pound on Tuesday the 27th of September, but although it has climbed a little (at the time of publication of this blog post it was $1.11 to the pound), the markets still seem quite wobbly and there's a lot of acrimony against the new Chancellor for not preparing the markets before making his announcement.
"So, how does a slide in the value of the pound against the dollar affect businesses in the UK?"
One of the reasons we have higher prices is because the cost of imported goods and services increases. When a UK company brings in food, raw materials or parts from abroad, they need to pay more for it because the pound is weaker against the dollar (and the euro), and therefore they charge more to us.
At a time when the cost of living is already soaring, this isn't a good thing as it boosts inflation. It also means the Bank of England is likely to increase interest rates further, hoping to cool off inflation as people switch to saving rather than spending.
And, of course, energy costs have soared thanks to the conflict in Ukraine. Russia has been cutting off countries for various reasons, but mostly because they're refusing to pay in Rubles which means there's less gas to go around, so the prices go up dramatically.
In addition, the gas that the UK uses is paid for in dollars, even if we produce it in our own country, so a weaker pound pushes up the domestic price. This is why the new Prime Minister, Liz Truss, has needed to put an energy cap in place this winter or the bills faced by households and businesses would have been ridiculous.
It is heartening to note that wholesale gas prices have come down recently as suppliers switch to alternative and more reliable sources, so the cap will cost the country less overall, which is a good thing for our national debt levels.
And oil is bought and sold in dollars too. Again, the wholesale price has been coming down in recent weeks, but drivers are not going to see any benefits at the pump because of the slide in the value of the pound.
"However, there is always a silver lining to every cloud!"
By contrast, some businesses in the UK are getting a boost from the fall in the value of the pound against the dollar and euro. A cheaper pound means it is less expensive for people outside the UK to buy products and services from British firms.
This could provide some benefits for those firms struggling with extra red tape and customs checks introduced after we left the European Union. It has been revealed that exports from the UK to the EU declined by 21% in 2021, so maybe a weaker pound will boost those exports dramatically.
The economy is going to be a bit bumpy for the foreseeable future, so do remember The Business Godparent is always here to help.
Until next time ...
ROGER EDDOWES Business Godparent
Would you like to know more?
If you're worried about your business in the face of a weakened pound, rising import costs and inflation that could soon hit 12%, it may be a great idea to give me a call on 01908 774320 and let's see how I can help.
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Roger trained at Edward Thomas Peirson & Sons in Market Harborough before working at Hartwell & Co, followed by Chancery, as a partner. He started Essendon Accounts and Tax with Helen Beaumont in 2014 as a general practitioner with a hands-on approach.
Roger loves getting his hands dirty, working with emerging, small-to-medium and family businesses to ensure they receive the best possible accountancy advice. Roger utilises an extensive network of business contacts to leverage the best guidance and practical solutions.
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