Following the UK mini-budget on Thursday, markets have not been kind to U.K. plc with shares, bonds and the Pound all selling off simultaneously leading commentators to make unkind comparisons with fragile emerging market economies.
This dramatic market reaction reflects concerns about financing the additional borrowing resulting from the highest level of tax cuts in half a century at a time when the deficit is already at a peacetime high. Financing an increasing deficit during a period of rising interest rates and with a deteriorating economic backdrop leaves only currency devaluation as a pressure release valve.
Global problems (high inflation/energy prices, snarled supply chains and economies restarting post-pandemic) have now given way to UK specific issues. Many are questioning the economic rationale behind large scale, untargeted giveaways when the state of public finances had already deteriorated due to the pandemic and when the Bank of England is already struggling to contain inflation. The BoE's inflation curbing mandate is also made more difficult due to the drop in the Pound.
UK productivity growth since 2009 has been the lowest in the G7 (bar Italy) and our persistent twin deficits also set us apart from others. Expect UK economic indicators to get more scrutiny (leading to more volatility) as interest rates rise and the impact of the mini budget are further assessed.
WHAT DOES THIS MEAN FOR BUSINESSES trading internationally?
The measures will bring short-term relief to businesses - the reversal of the National Insurance uplift, the cancellation of the planned increase in Corporation Tax and the cap on energy costs will all help. But there is no free lunch. The consequences are becoming less theoretical and more obvious: a rapidly devaluing, more volatile exchange rate and inflation that is higher and more persistent. This is already raising costs significantly. For a business buying goods or input materials in USD, the drop in GBP will already have added 24% to those costs relative to the start of 2022. Wage costs are also increasing with quarterly wage growth in some sectors running at 8%.
We have written previously about navigating a VUCA world (volatile, uncertain, complex, ambiguous) and removing avoidable uncertainties to make your business more resilient. The events of the last few days have highlighted that it will be some time before we revert to a period of financial stability and that the UK will be less insulated than many had hoped for.
In the meantime, every business should be looking to "de-risk" - that is to remove as many avoidable financial uncertainties as possible to give itself predictable, certain home currency (GBP) cashflows. HedgeFlows exists exactly in order to do that in a simple, accessible and efficient manner requiring no specialist knowledge. For more information, please contact us or download our Currency Management Guide for SMEs.