Belfast Telegraph

Richard Ramsey: Worst July ever seen for sterling against the euro to linger long in memory

Economy Watch by Ulster Bank chief economist Richard Ramsey

Seen from an exchange rate perspective, this has been a summer to forget for UK holidaymakers heading to Disneyland Paris
Seen from an exchange rate perspective, this has been a summer to forget for UK holidaymakers heading to Disneyland Paris

Last week marked back to school for many households and holiday memories were fading fast. But while pictures captured on smartphones will provide reminders of the summer, what will perhaps stick in the mind most for many who holidayed abroad is the expense, with the weakness of sterling the fly in the sun lotion.

From an exchange rate perspective, it was a summer to forget. July was the worst month to go holidaying in the eurozone since the single currency was created. A pound was worth less than €1.10. Four years ago, the same pound was worth €1.42.

It is a similar story against the dollar, with sterling going from $1.56 to $1.21 over the same period. Back in the day, pre-financial crisis, families going to see The Donald (Duck) in the US of A received two bucks for each pound, or €1.62 if visiting Disneyland Paris.

And last month was the worst August on record for sterling against the dollar - albeit that sterling was marginally stronger against the euro.

In September though, the pound was once again on the back foot, with political uncertainty driving the currency below $1.20 for the first time since 1985. Sterling's slide against the euro pushed it below €1.09, making a euro worth 92p.

They say that a week is a long time in politics, and this phrase could equally apply to the currency markets. Boris's baptism in the new Parliament has seen sterling recover as markets' fears over a no-deal Brexit recede. Clearly a no-deal Brexit would send the currency into a downward spin again, which could make next summer even more expensive for those heading to the eurozone or the US than this year. Could a no-deal Brexit mean no foreign holiday in 2020?

But while a staycation will help shield households from one impact of an unfavourable exchange rate, there are other impacts that we can't avoid. These include imported inflation, due to the cost of food, fuel and other goods that we import costing more of our pounds than they used to. In fact, Northern Ireland has seen the highest rate of inflation of all the UK regions since the EU referendum in 2016.

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The reason for this is that Northern Ireland households spend more of their money on essentials such as food and fuel, which have been subject to significant price inflation. Looking ahead, more of the same is likely in the months to come, squeezing local households further. The Bank of England estimates that every 5% depreciation in sterling adds almost 1% to consumer prices in the long-term.

Businesses will find it even harder than households to shield themselves from the impact of a weakened sterling. Unlike consumers, companies trading around the world can't exactly opt for a staycation instead. If they did, the sun could very quickly set on their prospects.

It is frequently said that a weak pound is great for exports, implying that depreciation is potentially an upside for an economy trying to grow its overseas trade. Currently the UK is enjoying a weak pound, but as the latest PMI says, exports from Northern Ireland firms have been falling for eight months in a row. As a very recent Department for the Economy report says, assuming that a weak sterling is good for business and exports is too simplistic. It's much more complicated than that. The study notes that 55% of local exporters also import, and therefore see the downside as well as the upside; and at present, the downside is bigger.

One major factor for businesses is that as consumers get squeezed by the higher inflation that results from a weak pound, consumer spending gets hit, and many companies will suffer as a result. In Northern Ireland, 75% of economic activity is dependent on consumer spending.

Even the agri sector, which would historically have welcomed and benefited from a weak currency (in part because its subsidies were paid in euros), will see other factors offset any potential gains; for example the introduction of tariffs and any non-tariff barriers that result from the UK leaving the EU. However, farmers, along with many other people in the economy, will be watching the currency markets closely during the rest of 2019 and into next year, and sterling's performance against other currencies will continue to be significant news.

This will be particularly so for retailers operating near the border, who will be hoping for many more shoppers from the Republic of Ireland heading north in the run-up to Christmas and beyond.

We've said already that a week is a long time in politics and a long time in currency markets. However, the next year, with a potential general election and the lingering threat of a no-deal Brexit, could potentially be seismic, not just for politics but also for the pound.

Some have even suggested that we could be set to see the pound go to parity (against the Euro) and beyond.

In next week's Economy Watch, we hear from EY Ireland chief economist Neil Gibson

Belfast Telegraph

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