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Will sterling’s rise harm the UK’s exporters?

Will sterling’s rise harm the UK’s exporters?

Opinion and data remains divided on whether sterling’s rise to a five-year high against the euro and dollar is harming UK businesses exporting to countries with weaker currencies.

According to the Office of National Statistics trade figures, the seasonally adjusted UK's deficit on trade in goods and services was estimated to have increased to £2.4 billion in May 2014, compared with £2.1 billion in April 2014.

Exports are growing, but in a slower pace than imports. Paul Hollingsworth, assistant economist at Capital Economics, said there were a number of headwinds that meant export growth could remain sluggish.

‘First, the adverse impact of sterling’s 12% appreciation over the past year has probably not been fully felt yet. And there are signs that the eurozone’s recovery may be losing steam,’ he said.

‘In addition, with relatively import-intensive investment and consumption continuing to drive the UK’s economic recovery, we doubt the trade deficit will narrow much this year.’

Some conflicting UK manufacturing data has emerged recently, with ONS announcing that output dipped 1.3% between April and May 2014. Meanwhile, a survey of 514 manufacturers by the CBI stated that demand for UK-made goods rose strongly in June 2014 and export order books were at a level well above the long-run average.

According to the CBI survey, 23% of firms said their export order books were above normal and 25% below normal, giving a rounded balance of -2%, above the long-run average of -20%.

Katja Hall, CBI deputy director-general, said: ‘Growth is broad-based, with the recovery spreading its roots, and firms have high hopes for the coming quarter. However, the recent rise in sterling could impact on the resilient export orders we’ve seen lately.’

Some commentators believe weaker demand from overseas, as well as the strengthening sterling in recent months, have contributed to the poor performance of the manufacturing sector, while others claim ONS manufacturing data represented a blip in the strong recovery and the growth is set to continue.

One UK company to issue a profit warning was Burberry, linking it to the weakness of Asian currencies against the pound. The British luxury fashion brand has achieved a strong following in many Far Eastern countries, but the unfavourable high exchange rates for Asian consumers might mean that the company’s sales there could suffer.

‘If exchange rates remain at current levels, the full impact on reported retail/wholesale profit in FY 2015 will be material. As an indication, rebasing FY 2014 retail/wholesale profit for current effective exchange rates would now reduce reported profit by about £55 million (H1 weighted) and adjusted operating margin from 17.5% to around 16%,’ Burberry’s July 2014 trading update stated.

Not everyone is feeling pessimistic, however. The next international push is predicted from small and medium-sized companies, a move that is also backed by the UK government with an increase in the amount of public funding, announced in the March 2014 Budget.

According to research from Clydesdale and Yorkshire Banks, the amount of products and services sold overseas by the UK’s small and medium-sized enterprises is set to increase in the next year. Over the next 12 months, the expectation is that overseas sales will grow to 24% of turnover, or equivalent to around £15 billion.

The survey stated that around a third (34%) of businesses said they were more likely to start exporting or increase their sales to overseas customers in the next 12 months.

Manufacturing businesses were the most bullish about their exporting prospects, with two-thirds of UK manufacturers expecting to start or increase overseas sales in the next year. This was followed by nearly half (48%) of IT and media companies intending to improve sales internationally.

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