How important is global trade to Britain?
It’s crucial. About 28% of the goods and services we produce are sold abroad while we import around 30% of those we consume. Overall, we are better at selling services than goods, which is probably just as well, since 80% of the UK economy is made up of services.
However, the past decade has hit Britain hard: our share of world trade has declined by about a third since the financial crisis.
Nevertheless, the UK still accounts for some 7% of global exports in services – far more than our share of global GDP, which is a little more than 3%. But although we punch well above our weight in services, we punch a little below it in goods – the UK accounts for a mere 2.5% of global goods exports.
Who are our main trade partners?
Our EU neighbours account for a bit less than half. About 43% of UK exports went to the other 27 EU countries last year, although that proportion has been falling steadily since the start of the century. When it comes to imports, 54% came from the EU.
However, if we consider the EU members as separate territories, our single biggest export destination is the US. China is sixth and is also the second biggest source of imports, after Germany.
The UK runs a trade deficit with the EU27, which widened to £60 billion in the 12 months to September 2016 – a big deficit in goods is only partly offset by a smaller surplus in services.
Since 2007, however, UK export performance has been stronger outside the EU than within it. The challenge post-Brexit will be to keep trade with the EU27 as stable as possible, while also continuing to grow our global trade.
Will a weaker pound help?
Not necessarily. A big, sudden drop in the value of sterling did boost UK exports in 1967, 1976 and 1992, but in each case it was clear the pound had previously been damagingly overvalued.
By contrast, in the wake of the 2008 financial crisis, sterling plunged, but exports slumped, too.
So far, the fallout from the Brexit vote has been between these extremes. In the five quarters since June 2016, while sterling plunged, exports fell slightly and then recovered that ground and a bit more.
Why has the impact of sterling’s depreciation been so underwhelming? First, many exporting businesses are locked into global supply chains and rely heavily on foreign imports for their inputs. Second, UK exports tend to be in high value-added areas where buyers of goods and services are less sensitive to price changes. And third, there’s still major uncertainty over what kind of trade deal will be struck with the EU and what any transitional arrangements might be.
What’s the impact of that uncertainty?
Exporters are understandably nervous about planning too far ahead and Britain’s manufacturers appear to have “hoarded” the cash gains from last year’s fall in sterling rather than ramp up output and sales.
When sterling slumped in the wake of the Brexit vote, exporters could have let their prices decline in line with the fall in the pound, with the aim of selling more of their goods to foreign buyers.
Instead, official statistics show UK companies pushed up their sterling prices by 12.7% year-on-year, letting them bank bigger profits but doing nothing to make them more competitive in the medium term.
That’s concerning because it suggests a lack of confidence in the opportunities Brexit might bring.
What are the opportunities?
According to the International Monetary Fund (IMF), 90% of global growth over the next two decades will come from outside Europe, so a globally oriented UK free to make its own international trade agreements could be well-positioned to take advantage.
Moreover, over the past ten years, UK exports to countries outside Europe have risen by 43%, while those to the EU have been flat. Britain, it seems, is perfectly capable of growing its trade with the rest of the world, even without free trade agreements in place.
And in any event, trade deals have historically been much less important in oiling the wheels of trade in services, compared with goods.
Of course, no sensible analyst would deny Brexit will entail risks, including the risk of currency volatility. But whatever your view of Britain’s decision to leave the EU, now is the time to start talking to experts, such as OFX, on how those risks can be managed.
What are the biggest challenges and opportunities for UK exporters post-Brexit?
Until Brexit talks progress further and more details are shared, we won’t know the full extent of the opportunities and challenges that will present themselves to British exporters, post-Brexit. Certainly, regulation will be on the list, if not at the top, when it comes to new challenges. UK exporters will need to be educated and prepare to integrate additional regulations into their business processes when it comes to exporting to our European Union neighbours.
Whilst there may be a high level of uncertainty come March 2019, it would be premature to say that there won’t be many opportunities as well. The biggest of which is trade talks, which could entail attractive new trade deals and agreements beyond Europe. These may take time to agree and implement, but it’s definitely an exciting longer term prospect for exporters who want to expand globally.
Will the euro remain strong through 2018?
Across the board the Euro has been barnstorming in 2017, which is quite the opposite of predictions early year. What was meant to be the year of political uncertainty in Europe never materialised. Instead, the Euro moved from strength to strength. From the Dutch and French elections to the potential European Central Bank ‘taper tantrum’, all went smoothly and hasn’t caused too much concern for the markets. Only the recent German elections (which many thought would be the least likely of events to cause upset) has raised questions around the continuing certainty of Euro strength.
In 2018, we await Italian elections, potential fresh German elections, should Merkel not secure a majority coalition and reactions from the second Catalonian independence vote to be held, this December. So, as the Euro closes out a strong year having faced many challenges, it’s not out of the woods completely and we’ll be watching events and reactions with interest as we enter 2018.
Is the eurozone crisis really over?
This is a key question for many in the market and a difficult one to judge. On face value the defeat of populism candidates Marine Le Pen and Geert Wilders at the start of the year consolidated the strength of the Eurozone, as both of these candidates were staunchly anti-establishment and anti-euro.
Next spring elections are set to be held in Italy, which, could be a cause for concern for many in the Euro-area and European Central Bank. Italy is the fourth largest country in the EU, contributing around 11% towards its GDP. At the forefront of next year’s elections is the Five Star Movement led by the former comedian Beppe Grillo, an inherent Eurosceptic with tough anti-immigration policies.
Lest we also not forget that Catalonia is set to go to the polls once again in December with both separatists and unionists tied in the polls. Should Angela Merkel not be able to construct the coalition she badly needs, we may see another German election in the calendar. We’ll also be closely watching separatist movements in Belgium, the heart of the Eurozone, as well as the rise of a new hostile bloc in Austria as we enter 2018, for signs of a crisis revived.
What is a virtual account?
A virtual account is a local currency account, available for online sellers or exporters to collect overseas revenues in local currencies. OFX offers local currency accounts in USD, EUR, GBP, CAD, AUD and HKD, allowing businesses to save significantly on transaction fees and margins when bringing overseas revenue home from international marketplaces.
At the moment marketplaces only send money to bank accounts that are situated within the various jurisdictions that the sales occur i.e. if you make a sale in Germany, you’ll need to provide German bank details to collect your revenues. More often than not this means a local bank will automatically convert funds at uncompetitive exchange rates.
With OFX’s proprietary banking relationships and ability to provide clients with their own, segregated local currency accounts in the Eurozone, these extra charges can be avoided. Businesses can leverage timing and favourable market rates to convert revenues to other currencies to ensure they keep more of their bottom line.
Can forward contracts be used with a virtual account?
Yes, absolutely. Virtual accounts allow online sellers to avoid high transaction costs and uncompetitive exchange rates by using their normal business bank accounts. At OFX, we’ve targeted high demand marketplaces worldwide and offer virtual accounts not only in EUR but also GBP, USD, CAD, HKD and of course AUD.
A forward contract allows businesses to lock in today’s market rates for delivery at a later time. At OFX, we work with clients to utilise them in conjunction with virtual accounts as an effective way to safeguard against the risks of selling overseas, whilst not sacrificing opportunities. For an average UK SME, this means they can hedge a desired percentage of their exposure for up to 24 months providing more stability to their business. Using both virtual accounts and forward contracts is a smart way to develop a longer term currency strategy to prepare for market volatility ahead.
• For more advice from OFX on imports, exports and supply chain payment matters, please click here