Jan 09 2019
Although the new year has begun with little further clarity on the exact course the country will chart through Brexit, the effects of any further fluctuations in the exchange rate are clearer. The Prime Minister has once again urged MPs to support the Draft Withdrawal Agreement, which is currently under discussion and is expected to be subject to a vote on 15 January; the smoother exit this would provide would likely limit the extent to which the pound may fluctuate. However, a no-deal Brexit has increasingly made the headlines, with ferry preparations underway, if a little awry, and Tuesday’s Commons amendment heralded as an ‘important step’ in preventing such an exit. No-deal would pose a much greater threat to the stability of the pound, with some forecasters, such as Swiss bank UBS, expecting parity with the euro should the United Kingdom leave without a deal. This series will consider the impact of exchange rate trends on the Tourism and Travel, Agricultural, and the Pharmaceutical and Chemical sectors, as well as discussing some industries particularly affected by input and trade costs.
The sharp downturn in the value of the pound immediately following the EU referendum, with the real effective exchange rate falling by 12.6% over 2016-17, has affected a number of industries across the UK economy. Inbound tourism received an almost-immediate boost, as cost-conscious tourists took advantage of favourable exchange rates, whilst exporting industries, many of which include a considerable value-added component, also became more competitive on international markets. However, many UK firms import a significant proportion of their inputs, complicating the issue of competitiveness, though denominational differences were beneficial for farmers, as CAP payments became much more valuable.
Tourism and travel
Research from Visit Britain conducted just after the referendum highlighted that 44% of previous visitors to the United Kingdom stated they were more likely to visit the country again as a result of the weaker pound. The trend was stronger amongst business visitors, 55% of whom were more likely to visit again as a result.
Consequently, many UK tourist businesses have benefited from the weaker pound; 4.3% more flights to the United Kingdom were booked in the month following the EU referendum than in the same month the previous year. With increased inbound business and touristic travel, the Holiday Accommodation industry grew by 7.3% in 2017-18. This was boosted by the fact that reduced purchasing power has discouraged Brits from flying abroad. Whilst this has threatened the performance of the Scheduled Passenger Air Transport industry, for which UK residents account for 67.4% of revenue, it has been a boon for domestic accommodation firms. Domestic guests are expected to account for 83.1% of the Holiday Accommodation industry’s revenue in the current year.
With many traditional travel agencies already facing severe online competition, the reduction in UK holidaymakers’ purchasing power has put the Travel Agencies industry (IBISWorld report N79.110) under further pressure. UK residents travelling abroad account for the bulk of the industry’s revenue, approximately 70% in the current year, but this has decreased considerably as a result of the weak exchange rate, and could continue to fall. Organisers of tours abroad have also been hit by the same trend, with consumers more likely to opt for less lucrative domestic tours, whilst their margins have come under pressure as the cost of foreign activities has risen.
The weak pound has also grounded the performance of the UK Corporate Travel Services industry, which contracted by 10.4% in 2016-17, and is only expected to stabilise through the current year. Industry demand is heavily dependent on business confidence and corporate profit, both of which came under pressure, whilst the weak pound further discouraged businesses from greenlighting foreign trips. Similarly to many touristic businesses that undertake spending abroad (see the Tour Operators industry, IBISWorld report N79.120), the weak pound has pushed up costs, hitting margins considerably through the current year. An increase in the value of the pound would benefit margins, but a return to buoyancy in demand factors may take longer.
IBISWorld has previously discussed the impact of Brexit on agriculture in terms of funding and seasonal labour, with the drop in the pound discouraging EU workers from travelling to UK farms and posing considerable difficulties for farmers across the country.
In addition to this, the National Farmers’ Union (NFU) has stated that three key factors related to the exchange rate affecting the agricultural sector are: the effect of the strength of the pound on exports and imports; the effect of the pound’s strength against the euro on the single payment scheme; and the effect of the exchange rate on farm income and profitability.
Agricultural industries most affected by the exchange rate include the Vegetable Growing, Flower & Plant Growing, Sheep Farming, and Aquaculture industries (IBISWorld reports A01.130, A01.190, A01.450 and A03.210). These have all benefited from increased international competitiveness since the depreciation of the pound, with flower and plant exports rising by almost 24% in 2017-18. Aquaculture leads the way for export-led performance, with exports accounting for 60.1% of revenue. Any further weakness in the pound could provide more opportunities for export-led growth, as long as no barriers to trade hamper the movement of goods.
The price of imported inputs, such as seeds and fertilisers, and the effects of a weakening pound on upstream suppliers, has pushed up purchase costs across the sector, however. Any further fall in the value of the pound could prove problematic, particularly for those agribusinesses with more limited exports. For example, the value of revenue generated by exports is expected to remain below 10% for flower and plant growers, vegetable growers and sheep farmers, despite the recent boost. Particularly for smaller operators, increases in purchase costs could outweigh the benefits attained from more competitive exports.
One final consideration is the impact the strength of the pound has on farming subsidies obtained through the Common Agricultural Policy. The NFU has highlighted that a stronger pound leads to a reduction in pound-converted support payments, putting pressure on UK farm income. The weak sterling has therefore been beneficial, with some farmers receiving more than 60% of their income through subsidies. In 2016-17, the average CAP payment rose by 19% according to Defra, with payments rising 6% in the following year as the pound remained weak. Assuming the United Kingdom remains part of existing schemes through a transitional period, farmers will watch movements in the value of the pound with interest.
This is a less significant factor for some agricultural industries. Flower and plant growers, for example, receive less in subsidies than other agricultural operators. For such businesses, the main impact of the exchange rate is on their international competitiveness and their purchase costs.
For more information on the effects of Brexit on UK industry, please contact IBISWorld about our 440+ Brexit Impact Statements.
For a printable PDF of Parting Exchange: Part One, click here.
IBISWorld industry reports used in this series:
A01.130 - Vegetable Growing in the UK
A01.190 - Flower & Plant Growing in the UK
A01.450 - Sheep Farming in the UK
A03.210 - Aquaculture in the UK
H51.101 - Scheduled Passenger Air Transport in the UK
I55.200 - Holiday Accommodation in the UK
N79.110 - Travel Agencies in the UK
N79.120 - Tour Operators in the UK
UK0.038 - Corporate Travel Services in the UK