Brexit: Currency Issues and Inflation - Part 2 [VIDEO]
Domtar Corp. CEO John Williams discusses the potential impacts of Brexit-related inflation and currency issues on manufacturing with Wells Fargo economist Jay Bryson and Jeremy Pilmore-Bedford, British Consul General, in this latest addition to our multi-part video series exploring Brexit’s potential challenges and opportunities for businesses on either side of the Atlantic.
Mark: You know we’ve talk a lot already about currency but Jay, can you explain how the pound retaining, the UK retaining the pound, how that has helped in this particular scenario so far?
Jay Bryson: Right, so even if the UK doesn’t go into a recession, and clearly it seems like economic activity is going to weaken and by continuing to have the pound at a lower rate, it’s on trade adjusted terms, it’s depreciated somewhere around 10-15% so what that does is that improves the price competitiveness of UK exports. And so if you view the UK and compare it say these are the Greece. You know Greece is in a depression right now but because they can’t adjust their exchange rate, they have to grind through this whole thing and so this, I think the term was used earlier, a shock absorber. Sterling does act as a shock absorber here. It does puts in play an ability for the UK economy to recover from this as their exports become cheaper and so obviously in retrospect it was a good thing during the crises. It’s even a better thing now that the UK still has its own currency can help it adjust.
Jeremy: Guys, further than Sterling as shock absorber, it actually is that Britain’s has more control over monetary policy as well as fiscal policy. So as you see the Bank of England the week before last, lowered interest rates to any quarter of a percent and issued another round of points devising but for corporate bonds and for government bonds, which a country that was in the Eurozone wouldn’t be able to do that, and you will also no doubt see the government reacting in terms of fiscal policy in due course during the full period probably the altered statements, and they’ve already said that they will be delaying the fiscal consolidation process.
Mark: Yeah, and I heard two things from you, Jon there, importing inflation and then also the UK could become quite a good hub for manufacturing. Um, we’ll leave the inflation to Jay, but just where are you with the UK becoming quite …
John: Well I think it’s a current, I think you’ve got to think about two things: how long will that currency remain as competitive as it is and that’s a very tough bet when you’re putting assets in. I mean in our case, we’re a consumer products business, so they’re fairly light assets, but if you’re a major manufacturer putting heavy assets in, you’re sitting there thinking okay, you know this is a 40 year, 50 year investment. It’s inconceivable the pound will be, I think anyway, as cheap as it is today over because obviously if this actually is a fairly benign impact for the UK, the one thing that’s going to happen is the pound will actually improve. So that’s sort of the irony of this. I think the other thing they’re thinking very carefully about is well what will be the negotiation between the UK and the EU in terms of trade. Now obviously a lot of these countries if they’re pragmatic have massive export to the UK and I know we’re thinking well they might be very careful. However, if emotion gets in the way, they might be less than careful. So I think if you think of all that together, as I said, I think you’re planning, but you’re certainly not acting. So you’re really sort of thinking about contingency planning and then you know when you feel you have some certainty, you may move.
John: In the very short term, however, you’re saying I need to improve the margin of what I’m selling into the UK and one way of doing that is actually to go in and ask for price increase, which I think you’ll see a number of people doing. Hence, the imported inflation.
View Part 1 - Brexit: Overview and Reactions
View Part 3 - Brexit: Outlook for the EU and Impact on the U.S.
View Part 4 - Brexit: U.S. Opportunity in the U.K.
View Part 5 - Brexit: The Impact on Mergers and Acquisitions
View Part 6 - Brexit: What the U.K.’s Exit Might Look Like