Strong pound has strangled UK growth, warns Bank of ...



Strong pound has strangled UK growth, warns Bank of England rate-setterSterling’s dramatic appreciation at the start of the year has put a damper on hiring and economic growth, a member of the Bank of England's Monetary Policy Committee has warned. A jump in the value of the pound has been estimated to have reduced the total number of hours worked by as much as 0.4pc, while the level of UK output could be 0.4pc lower as of the second quarter of this year. Kristin Forbes, an external member of the Bank’s interest rate setting committee, unveiled the findings during a speech at the Canada Imperial Bank of Commerce. As the UK's currency has gained strength, the cost of many goods have fallen, as the prices of imports has dropped accordingly. Yet an equivalent effect has been felt by many of Britain's largest companies. Ms Forbes noted that weighted against other currencies, sterling appreciated by 14.5pc between March 2013 and July 2014. The ascent of sterling has for example buffeted the FTSE 100, as its constituents make around 80pc of their sales overseas. "A stronger pound reduces the value of foreign earnings when translated back into sterling using the current exchange rate", she said. She added that "even if a firm listed on the FTSE produces and sells abroad, so that currency movements do not affect its relative costs, sales, or profits, these profits will be worth a smaller amount of sterling".Analysis by the Telegraph?found that the soaring pound had wiped ?1.5bn off the profits of UK plc by this August alone. Around 30pc of the UK’s main price index is made up of imported goods, such that “currency movements directly affect many prices and how far a family’s paycheck can go”, said Ms Forbes. As the Bank is mandated to target annual inflation at around 2pc, movements in the value of the pound are significant for monetary policymaking.022796500That’s despite the channel through which the exchange rate works operating very slowly. Bank analysis suggests that changes in import prices takes three to four years to fully filter through to domestic costs. A 10pc rise in the value of the pound would reduce the level of the consumer price index - the main measure of inflation - by about 2.7 percentage points in a shorter timespan, with just 90pc “pass through”. A 3pc appreciation of the dollar since early 2013 has resulted in similar headaches for the Bank’s US counterpart - the Federal Reserve.0-127000While less than a quarter of the rise in sterling, “this has already prompted analysis and discussion by the Federal Reserve Board of how this could present challenges for the economy and US monetary policy”, said Ms Forbes.The Bank official cited comments from William Dudley, president of the Federal Reserve Bank of New York, who said in September that “if the dollar were to strengthen a lot, it would have consequences for growth”.Typically the US government will only comments on the dollar to be made by the President and treasury secretary, as “there is such trepidation about how a single comment on the dollar by a senior official could cause gyrations in currency markets”, said Ms Forbes. Even the individuals in those two positions “are careful never to veer from very simple, carefully vetted, and largely meaningless talking points”, she added. pound wipes ?1.5bn off UK plc profitsThe soaring pound is savaging corporate Britain, with more than ?1.5bn wiped off the year-to-date profits of a string of top multinationals in recent days. The number of blue-chip companies to have reported, since the last week of July, big sterling-linked blows to their bottom lines has now climbed to 19. Defence company Cobham on Thursday reported it had taken a ?5.4m hit on first-half profits due to the strength of the pound; while engineering firm Amec said currency changes cut ?16m from its income in the six months to June 30.But the damage has been wrought across the entire spectrum of UKPlc.The?biggest casualties were Barclays, the high street bank, which reported a ?460m hit to profits at the half year; BAT, the tobacco producer, which attributed a ?400m drop in profits during the first half to the pound’s performance; and Diageo, the drinks giant, which said currency headwinds knocked ?350m off full-year earnings. GSK, Britain’s largest pharmaceuticals manufacturer, Merlin, the theme park operator, and contract caterer Compass have also been affected. The pound has soared 10pc against the US dollar and the euro in the last year on the back of Britain’s startling economic recovery – wreaking havoc with those companies heavily exposed to foreign markets.Between April and June, 63 UK-quoted companies issued profit warnings, the highest rate for three years. Adverse currency moves triggered a fifth of those, compared with just 3pc last year, according to EY, the accountancy firm. Industrial and engineering heavyweights are among the biggest losers, with the strong pound denting profits at Rolls-Royce, the engine maker; BAE, the aerospace and defence goliath; and GKN, the aircraft parts supplier. Meggitt, IMI and Weir were also squeezed.A strong pound delivers a double whammy. Exporters suffer as goods and products become less competitive overseas; then foreign earnings shrink when converted back into sterling for reporting purposes. Currency swings are felt most strongly among Britain’s largest companies. The FTSE 100 is one of the most international indexes in the world: Goldman Sachs calculates that 80pc of overall sales among the FTSE 100’s constituents are made overseas. Half of the FTSE 250’s sales are made beyond the UK. However, many chief executives remain calm about the strong pound on the assumption it is likely to level out in the coming months. Following a ?23m hit to half-year earnings, Angus Cockburn, the interim chief executive of power supply firm Aggreko, said: “Currency is like a fairground rollercoaster. What goes up one minute goes down the next.”Companies are under no obligation to reveal the impact of currency movements on their profits. However, of the 19 companies that have reported a blow to their pre-tax or operating profits from the strong pound in the past two weeks, 16 put a monetary value on the pain. Fourteen of those companies revealed the impact to their profits over the first half of the year. For the purposes of comparison, we halved the number when, in one case, a company estimated the impact of currency on its full-year results. Likewise, we doubled the figure for the one company that revealed how the strength of sterling altered its quarterly figures. ................
................

In order to avoid copyright disputes, this page is only a partial summary.

Google Online Preview   Download