Sterling’s continued concerning performance on international markets was highlighted this week with the news that it was being sold at less than one euro to the pound at some airports. Despite the notoriety of expensive airport currency transactions, this news is worrying to economic observers. The information was discerned from FairFX, a surveyor of airport Bureau de Change’s and is representative of sterling’s crash since Brexit, which saw the currency fall to its lowest level in over thirty years on currency markets. The effects of sterling’s poor performance are set to have far reaching ramifications for the UK economy.
One such implication will be seen in rising petrol prices, impacting consumers and businesses. According to the Petrol Retailers’ Association it is expected that prices will rise by an extra four or five pence by the end of October. On top of this, food prices are set to rise with the cost of foreign imports of staples such as pasta and dairy products rising. We are starting to see the impact of this already with Marmite and other such household names in short supply in major retailers. This was as a result of the parental brand Unilever demanding a higher price for its products due to production costs rising after sterling’s depreciation. The matter has been sorted for now, but don’t expect it to stay this way.
Of course the news of sterling’s poor performance at airports is representative of the increasing holiday costs that UK tourists will see on their trips abroad for the foreseeable future. Perhaps a domestic holiday will become even more appealing to consumers that have seen the cost of foreign holidays rise by over 10% for certain countries after the Brexit crash. On the positive side, this should be beneficial in attracting foreign tourists to the UK, but this will be of little comfort to the regular EU or indeed US traveller.
However, a depreciating currency is being seen as a positive occurrence in some sectors of the economy, notably exports where companies are effectively seeing a real terms price cut in their finished products, promoting their competitiveness. With the UK’s deficit in trade of goods and services estimated to be £3.5 billion in January of this year, this may sound like good news. In reality, the situation is much more complex with imports becoming more expensive, worsening the deficit. Thus for the foreseeable future domestic production will not be ready to compete. Aside from this, some export costs such as oil can simply not be avoided when prices increase.
Overall, the decline of sterling is a continuing threat to the recovery of the fragile UK economy. Perhaps ironically, the symbol that features on UKIP’s logo is now weaker than ever since the nation’s divorce from its foreign neighbours. In the meantime, expect more expensive necessities such as food and petrol which may give rise to an unheard of concern in recent UK economic debates, inflation.