Since the Brexit referendum result, sterling has fallen by 14% against the euro to £0.86. It has fallen by 23% since this week last year, when it was at £0.70. There are a number of competing narratives regarding the fall in the value of sterling doing the rounds in the UK. What is clear is that Brexit has damaged faith in the future of the UK economy.
This in turn has meant a fall in demand for sterling, making all British households poorer in the process. There is some truth in the argument that the pound has long been overvalued due to the capital magnet of the City of London, but claims that its depreciation will spark a British manufacturing renaissance are hopeful at best.
The truth, in either case, is not particularly reassuring for Ireland. This fall in sterling will both increase the cost of Irish goods going into the UK and mean increased competition on Irish shelves from British products.
The Irish agri-food sector is already feeling the impact. Last week’s trade figures for the year to August showed the value of Irish food exports to the UK fell by 8.1% annually. This represents an 18 percentage point downturn on the 10% growth in value recorded in 2015. This fall accelerated to 14.5% annually in the two months since the referendum and has hit all categories.
Two weeks after the Brexit result, Ibec conducted a survey of over 450 Irish CEOs. Of 12 potential options, exchange rate volatility was identified as the key immediate challenge; it was a top three concern for 60% of firms. Within this, indigenous firms were much more worried about sterling than multinationals. Indigenous firms, however, only account for around 11% of Irish exports and less than 15% of our exports go to the UK. As such, total Irish exports may still experience growth to the EU, US and elsewhere. It would be easy to underestimate the economic importance if you didn’t examine the detail.
Ingidenous exporters
Indigenous exporters spend as much in the domestic economy through purchases and wages as the multinational exporters. They also employ as many people, with even greater regional spread. These indigenous exporters are also much more reliant on the UK. Forty-three per cent of their output goes to the UK, compared with only 10% of that from non-Irish companies.
The impact of Brexit on the producers of 11% of our overall exports will be as important for the domestic economy as the fortunes of the producers of the other 89%.
Agri-food is by far the largest sector in that indigenous export base. It accounts for 61% of the goods exported by Irish owned firms. A recent statistical analysis performed for Food and Drink Industry Ireland suggested that a weakening of euro/sterling from the 73p average in 2015 to an extended period near the 90p mark would translate to a loss of €700m in food exports and 7,500 Irish jobs in food and related sectors. The impact will be particularly hard on rural areas. When combined with the impact of cross-border shopping, it could be devastating for the border counties in particular.
A weak sterling into the future?
We have been here before. Before the punt was taken off the peg in 1978, Ireland had parity with sterling for 150 years. In the late ’80s and early ’90s we went over 90p on a number of occasions.
During the financial crisis, we again saw exchange rates reach those levels. Between September 2008 and January 2009 the euro-sterling exchange rate climbed by almost 15%, while monthly Irish agri-food exports to the UK fell by a quarter. As sterling recovered its strength, however, exports recovered in tandem.
This time is different. Previous bouts of sterling weakness were cyclical; these recent changes represent a structural change in the strength of the currency. Depending on the political machinations in London, a weak sterling may be the new normal facing Irish exporters. Indeed, if the UK continues toward a “hard Brexit”, then euro/sterling will climb toward parity over the coming years.
Irish food industry
What does this mean for the Irish food industry? Lean manufacturing and capital deepening mean that there is very little fat to be trimmed off most Irish operations. Something else has got to give – either the already razor-thin margins or British demand for Irish produce. A serious blow to either will cost jobs. It is vital the Government reflect on its priorities for the sector in that context. Measures in the recent budget were a start in addressing the Brexit challenge, but did not go nearly far enough.
The focus now needs to be on competitiveness, market diversification and long-term sustainable finance. In order to limit the damage which the Brexit transition will do to viable companies, Government needs to provide emergency direct financial support to those most affected. Similar to measures taken during the financial crisis, this will require EU state aid approval and recognition of Ireland’s unique exposure. Without support both the industry and the rural areas which rely on it will have a number of challenging years ahead.
Sterling has weakened 14% since the Brexit referendum.Trade with the UK from January to August is down 8.1% annually.A euro/sterling rate of 90p translates to a loss of €700m in food exports.To limit damage, focus needs to be on competitiveness, market diversification and long-term finance.Listen to an interview with Irish Exporters Association Simon McKeever in our podcasta below:
Listen to "CEO of Irish Exporters Association on Brexit and Trexit" on Spreaker.
Since the Brexit referendum result, sterling has fallen by 14% against the euro to £0.86. It has fallen by 23% since this week last year, when it was at £0.70. There are a number of competing narratives regarding the fall in the value of sterling doing the rounds in the UK. What is clear is that Brexit has damaged faith in the future of the UK economy.
This in turn has meant a fall in demand for sterling, making all British households poorer in the process. There is some truth in the argument that the pound has long been overvalued due to the capital magnet of the City of London, but claims that its depreciation will spark a British manufacturing renaissance are hopeful at best.
The truth, in either case, is not particularly reassuring for Ireland. This fall in sterling will both increase the cost of Irish goods going into the UK and mean increased competition on Irish shelves from British products.
The Irish agri-food sector is already feeling the impact. Last week’s trade figures for the year to August showed the value of Irish food exports to the UK fell by 8.1% annually. This represents an 18 percentage point downturn on the 10% growth in value recorded in 2015. This fall accelerated to 14.5% annually in the two months since the referendum and has hit all categories.
Two weeks after the Brexit result, Ibec conducted a survey of over 450 Irish CEOs. Of 12 potential options, exchange rate volatility was identified as the key immediate challenge; it was a top three concern for 60% of firms. Within this, indigenous firms were much more worried about sterling than multinationals. Indigenous firms, however, only account for around 11% of Irish exports and less than 15% of our exports go to the UK. As such, total Irish exports may still experience growth to the EU, US and elsewhere. It would be easy to underestimate the economic importance if you didn’t examine the detail.
Ingidenous exporters
Indigenous exporters spend as much in the domestic economy through purchases and wages as the multinational exporters. They also employ as many people, with even greater regional spread. These indigenous exporters are also much more reliant on the UK. Forty-three per cent of their output goes to the UK, compared with only 10% of that from non-Irish companies.
The impact of Brexit on the producers of 11% of our overall exports will be as important for the domestic economy as the fortunes of the producers of the other 89%.
Agri-food is by far the largest sector in that indigenous export base. It accounts for 61% of the goods exported by Irish owned firms. A recent statistical analysis performed for Food and Drink Industry Ireland suggested that a weakening of euro/sterling from the 73p average in 2015 to an extended period near the 90p mark would translate to a loss of €700m in food exports and 7,500 Irish jobs in food and related sectors. The impact will be particularly hard on rural areas. When combined with the impact of cross-border shopping, it could be devastating for the border counties in particular.
A weak sterling into the future?
We have been here before. Before the punt was taken off the peg in 1978, Ireland had parity with sterling for 150 years. In the late ’80s and early ’90s we went over 90p on a number of occasions.
During the financial crisis, we again saw exchange rates reach those levels. Between September 2008 and January 2009 the euro-sterling exchange rate climbed by almost 15%, while monthly Irish agri-food exports to the UK fell by a quarter. As sterling recovered its strength, however, exports recovered in tandem.
This time is different. Previous bouts of sterling weakness were cyclical; these recent changes represent a structural change in the strength of the currency. Depending on the political machinations in London, a weak sterling may be the new normal facing Irish exporters. Indeed, if the UK continues toward a “hard Brexit”, then euro/sterling will climb toward parity over the coming years.
Irish food industry
What does this mean for the Irish food industry? Lean manufacturing and capital deepening mean that there is very little fat to be trimmed off most Irish operations. Something else has got to give – either the already razor-thin margins or British demand for Irish produce. A serious blow to either will cost jobs. It is vital the Government reflect on its priorities for the sector in that context. Measures in the recent budget were a start in addressing the Brexit challenge, but did not go nearly far enough.
The focus now needs to be on competitiveness, market diversification and long-term sustainable finance. In order to limit the damage which the Brexit transition will do to viable companies, Government needs to provide emergency direct financial support to those most affected. Similar to measures taken during the financial crisis, this will require EU state aid approval and recognition of Ireland’s unique exposure. Without support both the industry and the rural areas which rely on it will have a number of challenging years ahead.
Sterling has weakened 14% since the Brexit referendum.Trade with the UK from January to August is down 8.1% annually.A euro/sterling rate of 90p translates to a loss of €700m in food exports.To limit damage, focus needs to be on competitiveness, market diversification and long-term finance.Listen to an interview with Irish Exporters Association Simon McKeever in our podcasta below:
Listen to "CEO of Irish Exporters Association on Brexit and Trexit" on Spreaker.
SHARING OPTIONS