Although the value of the pound has been falling for some time, the vote to leave the European Union has had a big effect in recent months.
The pound fell in value against many other foreign currencies on June 24 when the referendum result was announced and fell again in the beginning of October, following further announcements about Brexit.
How the value of the pound compares to its value on the day the date for the EU referendum was announced, January 2016 to October 2016
A preliminary estimate of 0.5% growth in GDP in July to September 2016, was accompanied by a rise in the value of the pound yesterday (October 27, 2016).
The pound is widely traded on international markets which means its value can fluctuate on a daily basis.
Since the referendum there have been falls in demand for the pound influenced by:
- a cut in interest rates – all else being equal, this could cause investors to move their money into other countries that may pay them a higher return
- expectations from some commentators for lower growth and higher inflation in the UK - which could make investing here less attractive
But what does this mean for people in the UK?
If you've been on an overseas holiday this year you will have probably noticed that your money didn't go as far as it may have done in the past, but, aside from this, how else could the fall in the pound affect the UK economy and therefore, you?
A fall in the value of the pound will increase the price of goods and services imported into the UK.
Even so, it is difficult to predict how changes in the value of the pound will feed through to the overall price level. There are many factors that could delay the effect (such as supermarkets buying stock in advance) and some businesses may choose to absorb the higher costs rather than pass them onto consumers.
In the most recent data we published, inflation (as measured by the Consumer Prices Index) rose by 1.0% in the year to September 2016.
However, inflation has been on an upward trend since late-2015 and when analysing the cause of this month's rise, Head of Inflation Mike Prestwood said: There is no explicit evidence the lower pound is pushing up the prices of everyday consumer goods.
UK headline rate of inflation (as measured by the Consumer Prices Index), January 2008 to May 2016 (12 month percentage change)
However, there is evidence that the fall in the pound has led to increased costs for businesses that import their production inputs - for example metal, equipment and oil.
The most recent data on input producer prices shows that they rose 7.2% in the year to September 2016.
Rate of change in input prices for businesses, UK, September 2012 to September 2016 (12 month percentage change)
Higher export sales could increase growth, employment and living standards
A fall in the pound means that UK exports will be cheaper for customers in other countries to buy. This should help UK companies increase the amount of goods and services they sell to the rest of the world which would bring more money into the UK – potentially increasing employment, growth and therefore living standards.
But there are a range of factors that affect the sale of UK exports, such as:
- how well UK companies are set up to exploit export markets – for example, it can take time for a business to adapt its processes to sell overseas and find profitable opportunities where potential customers will demand its goods
- the economic conditions in other countries – if other countries are in an economic downturn they will not have the money to spend on our goods
- how sensitive the demand for our exports is to price – for example we export Rolls Royce cars but the demand for these is not very sensitive to price changes as they are a luxury item. This means the number sold may not significantly change as the price changes
- the trade arrangements that exist to access markets across the world
The UK has long had success when it comes to exporting services, especially financial services. However, less success has been found in more recent years when it comes to exports of manufactured goods.
We have limited data on how export sales have performed following the fall in the pound, but it will be interesting to see what happens to this data in coming months.
The percentage of UK output (Gross Domestic Product) coming from the exports of goods and services
More visitors to the UK and a rise in the staycation?
A fall in the value of the pound makes it cheaper for overseas visitors to come here and spend money, and more expensive for UK residents to visit places abroad.
This could mean if you opt for a 'staycation' over a holiday abroad, you may find the queues that bit longer and the traffic that bit more congested!
But again, there are many factors that can affect tourism.
For example, there has been an upward trend in the number of people visiting the UK since late 2012, but this has not been driven by the value of the pound, which had also been on an upward trend until earlier this year.
Instead, the increase in visitors has been largely driven by a rise in the number of visitors from Europe, including countries that recently joined the EU. There have also been large proportional increases in visitors from China and other emerging economies who now have the money to travel further afield.
Visits to the UK, seasonally adjusted, 2006 to 2016
Furthermore, nothing yet suggests that 'staycations' have risen in popularity. The number of UK residents travelling abroad has continued to rise in line with the trend seen since the economic downturn in 2008.
This may be because there is no evidence (at this stage), to show a fall in the pound has had an effect on air fares or the prices of package holidays.
UK residents' visits abroad, seasonally adjusted, 2006 to 2016
There is some evidence that the fall in the pound has attracted tourists on shopping sprees for luxury goods - good news if your livelihood is connected to these businesses! In July, sales of watches and jewellery were up 16.6% on the year and there was anecdotal evidence suggesting that the weaker pound was encouraging overseas visitors to buy more goods.
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