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The value of sterling

20th October 2016

Home » Barbour ABI Blog » The value of sterling

The fall in the value of the pound is the most tangible effect of the outcome of the EU referendum

If the party conference season is anything to go by, it looks like we are heading for a “hard Brexit”, which conjures up images of watery porridge and stale toast as opposed to the “soft Brexit” of smoked salmon and scrambled eggs. While I’m tempted to say it’s more like a dog’s breakfast, it still feels to me like a bout of shadow boxing before the main event occurs in 2017.

That said, the impact on the value of the pound is probably the most tangible effect of the outcome of the referendum. This month, it touched its lowest level since the euro was introduced in 1999 and the primary threat to the UK economy is likely to be through higher levels of inflation due to a rise in import prices. With wage growth still relatively low in historic terms, the immediate danger is that inflation will rise, squeezing real earnings.

UK construction is not as exposed to currency fluctuations as other industries but it is still an issue, especially if consumer spending on major items such as houses declines. That said, the latest ONS statistics suggest that housing is holding up particularly well, with output this August 9.4% higher than in August 2015. The fundamentals for housebuilding remain strong, with high levels of demand and continued government support for first-time buyers through Help to Buy. Even though the mortgage guarantee part of the scheme is ending, the much more popular equity loan part is being retained and it is likely to sustain the current levels of activity.

For other sectors, the outlook is less certain. Private commercial should, in theory, be more attractive to foreign investors due to the falling value of sterling.
And the latest figures, which show private commercial output is 3.6% higher than in August 2015, lend some credence to that. However, private industrial output is 13.1% lower than in August last year, indicating all is not rosy. Of course, manufacturing exporters could benefit through a weaker currency, meaning more construction in the future. The question over the UK’s future trading arrangements is likely to be more important to these sectors. So a quick resolution to that issue would be the best outcome for construction. I do not live in hope.

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