COMMENT - What price the continuing rise of sterling?
The steady and, so far, sustainable appreciation in sterling over the last few months has, not surprisingly, set alarm bells jangling in boardrooms around the UK. Those companies which thought the pound’s near 15% appreciation since last August may have been a flash in the pan have been sorely disappointed.
That’s not to say that the situation can’t change. Long-term sterling bulls lie dead and eviscerated the length and breadth of Threadneedle St.
But in the short term the pound’s strength has been claiming scalps a plenty among Britain’s exporters, particularly those focussing on sluggish continental European markets. British Steel has been caught in a double whammy. Having 30% of its sales in Europe is bad enough but when consideration is taken of the fact that its domestic business faces pressure from imports denominated in cheaper deutschmarks, then the situation gives rise for some concern. Analysts say next year’s profits could be halved if current foreign exchange rates are maintained. Among the UK’s other blockbusting companies, ICI looks vulnerable: squeezed between uncompetitive exports and industry overcapacity that prevents any margin improvement.
Of Britain’s engineers, defence and aerospace groups such as British aerospace and GEC are relatively immune: protected by the long-term nature of their contracts. But for the likes of GKN, Smith Industries, BTR and T&N the going will be appreciably tougher. Likewise for pharmaceuticals and spirits manufacturers, those that have failed to hedge against sterling strength will pay the price.
On the other side of the coin, food manufacturers should benefit from lower import prices. Whether they get to keep any gains from the clutches of the supermarket giants remains to be seen, though.
The message surely is clear. Britain now has some of the most advanced, efficient and profitable businesses within the European Union – paid for, by and large, from a combination of appreciative capital markets and painful restructuring. It would be a shame that this sort of competitive advantage could be casually discarded by the short to medium term whim of currency markets. If ever there was a need for a regime of stable exchange rates now must be the time.