The exchange rate: why it is, and isn't, an issue for UK manufacturing

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In the last couple of months, Sterling has strengthened against the Euro, and it’s strengthened sharply. Since the start of the year, Sterling has appreciated 10% and it hasn’t been this strong against the Euro since December 2007.

 

The Sterling is at is strongest level compared with the Euro since 2007
Spot exchange rate, Euro into Sterling
sterlingeuro
Source: Bank of England, 2015

So, what impact will this have on manufacturing?

The answer is mixed (and we have discussed this in previous blogs). With regards to the impact on exports, those manufacturers in more commoditised sectors – such as basic metals – see demand hit quickly by a stronger Sterling. However, those manufacturers with more complex or niche products, exchange rate changes can take much longer to affect demand, if it is affected at all. The overall impact on exports is therefore unclear, and it’s worth noting that when Sterling was heading in the opposite direction it appeared to have little impact on exports.

In contrast, while a stronger Sterling might make our exports relatively more expensive, it also makes imports cheaper. This can be positive for some manufacturers as it reduces the price of inputs into the production process. This is particularly beneficial for those manufacturers who import a large proportion of their inputs.

Nonetheless, exchange rate volatility does make life more challenging for manufacturers. In our Executive Survey this January, manufacturers told us that their second-biggest concern in 2015 was significant movement in exchange rates. This year, 38% of manufacturers thought that big swings in Sterling might affect their growth, with larger companies – who are generally more exposed to export markets – particularly likely to express concern.

This survey highlights the view that, for manufacturers the impact of an appreciation is not necessarily felt on export volumes. While approximately half of manufacturers said sales volumes were a concern, it was the impact on margins that manufacturers were most concerned about.

Sectoral variation is also a theme here; for example, companies in metals sectors were more likely to express concerns about domestic competitiveness, as their products may be more easily be substituted for imported alternatives.

Europe is not the only game in town

It’s also worth noting that while Sterling might be stronger against the Euro, this doesn’t give us the complete picture. For example, the US dollar has been moving the other way.

The Euro and the dollar have moved in different directions
Spot exchange rate, US $ into Sterling
SterlingEuroDollar
Source: Bank of England, 2015

Not only this, but manufacturers have been working proactively to move into a range of emerging and fast growing markets, and the proportion of exports going to non-traditional markets has been rising steadily over the last few years, which is a real success story for manufacturing.

Indeed, trade data out today shows that – despite all the uncertainty in our largest market – manufactured exports have now risen for five consecutive months. What is more, our recent Manufacturing Outlook survey shows that, on balance, manufacturers are optimistic that export growth will continue.

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