LONDON – The drop in the British currency on Friday will have an impact not just on the local economy but also on companies from around the world doing business in the country as well as tourists and shoppers.
Continue Reading Below
The pound fell as much as three cents against the dollar, from $1.2950 to $1.2635, after the British election produced no clear winner. By Friday, it had recovered slightly to $1.2755.
The drop is not as dramatic as the near 17-cent slide — from $1.50 to $1.33 — that the currency endured after Britain voted last year to leave the European Union, but it is likely to be felt broadly if it is sustained.
Here's a look at the main effects it could have.
Continue Reading Below
A drop in the pound makes it cheaper for people holding other currencies to visit Britain — and shop there. Britain has already seen a surge in tourism since the pound dropped on the Brexit vote last year. A record 37.6 million people visited Britain last year, spending 22.5 billion pounds ($29 billion), with visits from the U.S. up more than 10 percent. It's not just the stay that's cheaper. London is one of the biggest destinations for international shopping, particularly luxury goods, and the weaker pound has helped sales. Companies like Burberry have credited tourist shopping for helping to boost sales.
The drop in the pound will help lower the cost of Britain's exports around the world. Retailers tend to have contracts on imports that span months, if not years, to avoid the uncertainties of fluctuating currencies. So don't expect the price of a bottle of Scotch whisky to fall overnight. But in the longer-term, as the supply contracts are renegotiated, a weaker pound will, all other things being equal, reduce the cost of British goods sold around the world.
BRITAIN'S COST OF LIVING
The opposite is true for the British: imports for them become more expensive as the pound drops. Some things, like oil and car fuel, which are priced internationally in dollars, will reflect the pound's drop quickly by edging up. Other things, like foreign cars and food, could take longer as supply contracts get renewed. Since the pound's big fall on last year's Brexit vote, inflation has risen faster than wages across Britain, eroding people's standard of living. Higher inflation also eats away at the benefits exporters will get from the lower pound.
British companies become cheaper takeover targets and will find it more expensive to buy foreign companies. Since last year's sharp fall in the pound, British companies have been approached and been taken over. Software company Arm Holdings was taken over by Japan's Softbank for $32 billion. More recently, consumer goods giant Unilever has rebuffed a $143 billion approach by Kraft Heinz.
The British currency's drop will have an automatic impact on company earnings. British multinationals like BP or Shell will see their revenues made in other countries become more valuable when repatriated and translated back into pounds. For non-British companies, their revenues in Britain will take a hit. Some companies have raised their prices or reduced the amount of goods sold in Britain to make up for the decline in local revenue. The issue was highlighted when Mondelez International, based in Deerfield, Illinois, last year reduced the size of some of its Toblerone chocolate bars in Britain.