World First’s Global Trade Barometer reveals that in Q4, the number of businesses protected by pre-Brexit FX hedges dropped by 23 per cent leaving a significant proportion of SMEs exposed to the weaker pound.
This fall in protection against currency volatility has resulted in 38 per cent of SMEs feeling the negative impact of exchange rate movements in Q4, compared to 28 per cent in Q3. This comes as almost a third of businesses (30 per cent) say currency volatility impacted their investment decisions in Q4.
As pre-referendum hedges continue to expire over the coming months, almost half of all SMEs (45 per cent) admit to being worried about volatility, compared to just 38 per cent in Q3.
With more businesses becoming exposed to the weaker pound, we are already seeing consumer inflation rising at rates not seen in over two years and are likely to continue to see the effect on people’s spending. This will prove beneficial to exporters, but will put a strain on importers’ margins.
Commenting on the post-referendum effect of a weaker sterling on UK SMEs, Jeremy Cook, chief economist at World First, says, ‘After the topsy turvy year behind us, it is no surprise that SMEs are feeling currency fatigue and many are worried about the impact any further volatility could have on their business.
‘Unfortunately, more SMEs are going to be thrust into the currency wilderness as hedging contracts purchased before the referendum start to expire. An increasing amount of SMEs will be starting to feel the pain of the weaker pound, feeding directly into import price-led inflation.’
UK SMEs remain resilient
Despite ongoing political and macroeconomic uncertainty, UK SMEs continued to show resilience at the end of the year with volumes of international trade reaching record amounts since World First started tracking the data in Q1.
Throughout Q4, businesses made currency transfers worth an average of £48,000 in a typical month; a significant 26 per cent jump compared to the average monthly transfer value of £38,000 in Q3. The proportion of SMEs engaged in international trade also increased over the quarter with those who did not make any foreign currency transfers at all dropping from 47 per cent in Q3 to 41%.
The sharp increase in international payments by SMEs was driven by activity in emerging markets. Between Q3 and Q4, payments to New Zealand rose by 69 per cent, Mexico by 56 per cent and Turkey by 39 per cent, amongst others. Contrastingly, the number of UK SMEs trading with Europe and the US slowed slightly (7 per cent and 1 per cent respectively) as the first effects of the weak pound began to trickle through.
Jeremy Cook, continues, ‘Despite the predictions of doom and gloom following the EU referendum, UK SMEs remain buoyant with more adopting a global outlook and looking further afield for suppliers and customers. By thinking outside of the transatlantic box, businesses are able to harness the opportunities available on a global level.
‘The breadth of countries that UK SMEs trade with shows that even though we are seeing an anti-globalisation rhetoric sweep across the West, businesses are embracing the prospects that trading internationally offers. From Portugal to Peru, UK SMEs are increasingly keen to engage in buying, selling and working across borders.’
Lessons learnt from the EU referendum for the US election
In the week leading up to the US presidential election in November, the number of UK businesses trading in America who purchased hedging products jumped by over 188 per cent compared to the week before.
This suggests that more SMEs have learnt their lesson from the fallout of the EU referendum and chosen to protect themselves from future currency volatility during times of political uncertainty.
Jeremy Cook adds, ‘As we await further political change from the upcoming elections across Europe in the Netherlands, Germany and France, the message is clear for UK SMEs trading internationally – volatility isn’t over yet.’