Your crash course in... What Brexit jitters are doing to the pound - and how it affects us
These are the key points you need to know about what the approach vote is doing to sterling.
WHEN THE PROSPECT of UK voters opting to leave the EU looked relatively remote late last year, the pound was still sitting pretty.
Fast forward to this year when the ‘leave’ side began to draw consistently ahead and it has been a very different story.
The value of sterling against both the euro and the US dollar hit an eight-week low today, a fall of more than 15% and 20% respectively on what the UK currency was fetching in July last year.
The trigger appears to have been a series of polls pointing to a strengthening in the leave vote – coupled with some dire forecasts about the damage turning its back on the EU would do to Britain.
The latest Financial Times ‘poll of polls’ has the out vote five points ahead at 48% to the ‘remain’ side’s 43%.
It is the first time since the news organisation started tracking surveys, in September, that the Brexit camp have pulled significantly ahead, while a separate YouGov poll had the Leave side seven points in the lead.
So what’s going on with the pound?
A recent survey of UK economists showed that none believed a so-called Brexit would be positive for the country’s economy, while nearly half thought it would have a “significantly negative impact”.
The Economist Intelligence Unit predicted ditching the EU would cost the country 6% of its potential real GDP by 2020, while sending the pound about 15% lower on average this year against the dollar than during 2015.
PwC has predicted a vote to leave the EU would push the value of sterling close to parity with the euro in the aftermath of the poll.
When it comes to the flagging currency, the theory goes that in the months after a Brexit vote there would be a sell-off of UK assets – cutting relative demand for sterling, and therefore its value, on international markets.
In the longer term, the pound will be more at the mercy of interest rates – which have already been fixed at a record low of 0.5% in the UK since 2009.
Expectations of any increases have already been pushed back several years amid weakening economic growth in the country and stubbornly low inflation.
Earlier this week the annual inflation figure came in at 0.3% – well below the Bank of England’s target of 2%, which it hasn’t hit for several years.
Bank of England interest rates
Low interest rates, coupled with a widening current account deficit, drive down the value of the pound as there is less demand on international markets for the currency.
What does it mean for Irish businesses?
A weaker pound against the euro carries a lot of bad news for Ireland, although it isn’t all doom and gloom – there’s an obvious upside for businesses that rely heavily on buying goods from our near-neighbour as their imports become a whole lot cheaper.
However, industries that rely heavily on exports to the UK, particularly the agri-business, food and drink sectors, can expect to take a hit as their products become less competitive compared to homegrown options.
Tourism is another industry that’s susceptible to any fluctuations in the exchange rate. Tourists from Britain account for more than 40% of all overseas visitors to Ireland, more than all other countries in Europe combined.
Then there are the businesses in the Republic that are exposed to cross-border trade, which will find their products a lot less attractive compared to those in Northern Ireland for those with the option of buying in either territory.
Earlier this week, the Central Bank again warned about the dangers of a Brexit in its latest economic review, predicting a negative impact on Irish exports if a leave vote goes through.
A volatile exchange rate “provides some challenges for indigenous firms who export to the UK”, it said, adding that the scale of any changes to the free flow of goods, money and labour were also downside risks for the future.
Of course, there are some potential upsides. Ireland has already been highlighted as a likely destination for more skilled workers in the case of a Brexit and a more valuable euro, assuming UK salaries don’t increase by one-quarter overnight, can only help that scenario.
What’s the long-term picture?
In the longer term, the pound should eventually rebalance in the case of a Brexit – although exactly when and how that happens is anyone’s guess.
Lower imports into the UK will cut the country’s current account deficit, while the higher expense of those same goods and services could be the inflationary kick-start central bankers have been waiting for.
That’s assuming the most apocalyptic of Brexit forecasts, involving the break up of the Union and the general downfall of Western civilisation, don’t come to pass.
But, if the leave vote does go ahead, that rebalancing could be a long time coming – with a lot of pain felt by Irish exporters until then.
