7 ways the fall in the value of the pound affects us all

What it means for holidaymakers, families, pensioners and workers

Click to follow
The Independent Online

The pound is trading at a new 31-year low level against the dollar at $1.2749, having been hit hard this week by Theresa May’s announcement that she will trigger the Brexit divorce proceedings by March 2017.

But how will the slide in the value of our national currency affect different groups in society?

Holidaymakers

The summer holidays are over now but many people who changed their pounds into euros or dollars after 23 June will have noticed that their money went a lot less far than it did before.

Some airport bureau de change were even offering less than €1 for £1, despite the market exchange rate being more than €1.14.

People preparing to book winter breaks overseas or foreign holidays for next summer early will soon notice a spike in prices.

Families 

Inflation is still pretty low at just 0.6 per cent in August. Food prices are subdued thanks to the ongoing supermarket price war.

But that is not likely to last for long.

The price of imported food and other goods is rising because of sterling’s depreciation. And the price of raw materials for UK firms, which tend to be priced in dollars, is also increasing pretty rapidly.

These increases will ultimately be passed on to customers in the form of higher prices.

The Bank of England thinks consumer price inflation will spike above its 2.5 per cent target by the beginning of 2018.

This means that the weekly food shop is likely to be more expensive relatively soon.

And so will high street shop prices.

The further sterling declines, the bigger the price impact on families.

Workers

Workers have seen wages finally rising in real terms in recent years.

But this is not because nominal wages are rising strongly, but because inflation has been so weak.

Nominal average wages rose at an annual rate of just 2.3 per cent in July – well below the pre-financial crisis average rate of around 4 per cent.

If the pound’s fall does push inflation up, employers are unlikely to push nominal wages up to compensate.

The result will be a new squeeze on the purchasing power of wages.

Companies

Some goods exporters will benefit from the slide in sterling. Their exports will become instantly cheaper on world markets.

They could hike sales prices to increase short-term profits.

Or they could keep them fixed and benefit from an increase in foreign demand and market share, which could help their longer term profitability.

To meet this new foreign demand they could increase hiring. They might also need to increase wages to attract more workers.

There are some signs of these positive effects, UK manufacturing firms are reporting strong growth in export orders since the referendum vote.

The fall in the value of sterling has also made some UK business assets look cheap.

There was some suggestion that the takeover by Japan’s SoftBank of the UK chip firm ARM could have been influenced by the weakness of the sterling exchange rate.

There is also specific impact on multinational FTSE 100 companies which report their profits in sterling but have a large share of their revenues in foreign currencies.

They have tended to see their share prices rise with each downward lurch of sterling since depreciation automatically makes them more profitable.

Mortgage borrowers

People taking on big new mortgages to move house should not feel any direct impact from sterling’s depreciation, assuming they are paid in sterling and they are buying in the UK.

If they are buying abroad, however, they could face a problem because their money will not go as far as it did.

Alternatively, if they are buying in the UK and they are paid in foreign currency they will have benefited.

At the top end of the London housing market the fall in sterling seems to have made UK assets look better value, although the market is still weak.

Tourist sector workers

The fall in the value of the pound has made the UK cheaper and more attractive to foreign tourists.

This is good for anyone who works in the hospitality business or the part of the retail sector aimed at tourists.

Retail sales seem to have been boosted since the referendum by an influx of tourists.

Pensioners

Like people with mortgages, the direct impact on pensioners of sterling’s fall should be neutral in that they have a stream of payments in sterling and they spend in sterling.

If they have savings invested in FTSE 100 companies pensioners might even have seen some benefit from the depreciation.

An exception is those UK pensioners living in Spain. Their sterling-denominated pensions paid from the UK will now buy less locally than they did previously.

Comments