How has the depreciation of sterling affected manufacturers?

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Today's trade figures showed that in the three months leading up to January 2013, the value of exports to the EU fell by 4.9% compared with the same three months a year earlier. However, sterling depreciated against the Euro in this period, so it might be better to look at the volume of exports – and even this fell by 2.9%.

It is often assumed that a weaker exchange rate will boost exports. This is because a cheaper currency means cheaper exports, which should mean more sales to overseas markets.

Indeed some of our members have told us just this. One, who said that his company sold mainly to Europe, thought that the depreciation of sterling should provide a boost to his company's export volumes. Others are keeping prices in Euros the same but seeing improved margins.

This is great news for these companies, and there will be many like this. But it is only one side of the story.

A key problem with weaker sterling is that it makes imports more expensive. Many UK manufacturers import their machine tools, these are expensive pieces of capital equipment which manufacturers need for a whole host of reasons such as boosting productivity, increasing capacity and reducing lead times.

Some of our members have told us that they primarily source machine tools from places like the Eurozone and Switzerland. The recent depreciation of sterling has just made this equipment more expensive.

And it is not just machine tools, but other inputs such as specialist metals, components and raw materials that have become more expensive as a result of the weaker sterling.

One manufacturer told me that the assumption that a weaker pound would benefit UK manufacturers belies a misunderstanding of how the sector works, adding that most UK manufacturers are in the business of adding value to imported goods.

Although there are other countries that companies can source inputs from – such as Japan, where the sterling/yen exchange rate has become more favourable in this regard over the last three months – changing suppliers takes time and is not straightforward, as manufacturers often have established relationships with existing suppliers.

For some more discussion of these issues see our recent blogs:

Is the depreciation of sterling a good thing for the economy?

Sterling depreciation… a side note.

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