LONDON: Imports into the UK will decline as foreign products become more expensive thanks to the weakening of sterling, ratings agency Fitch warned yesterday.
An impaired pound harms the competitiveness of exporters into the UK because it cuts margins and makes it more expensive for them to do business. But it benefits UK and Northern Ireland domestic businesses.
The pound has weakened considerably since late last year. At the end of November, €1 bought 69 pence. At the close of the referendum polls on Thursday, that had changed to 76 pence. When the Brexit vote became apparent, it fell even further, and it is currently hovering around the 83 pence mark.
Fitch said the fall in sterling would boost UK exports while having a negative effect on imports into the country.
“Imports look likely to decline as investment contracts and foreign products become more expensive, resulting in expenditure switching to domestically produced goods and services and higher inflation,” the ratings agency indicated.
Fitch, which has already warned that Ireland is one of the countries most exposed to the effects of a Brexit, explained that businesses in Britain were facing uncertainty on three fronts – the future of the UK’s trading relationship with the EU, the shape of the regulatory framework and domestic political instability, including the future constitutional status of Scotland.
The rating agency warned that investment in Britain was expected to fall by 5% in 2017 and by 2018 would be 15% lower than the organisation previously predicted in its May 2016 Global Economic Outlook report. “The long-term impacts of Brexit on the economy are harder to estimate with great precision,” it added.
“However, in addition to less favourable access to the European Single Market, reductions in trade openness and inward foreign direct investment could harm productivity performance, while reduced immigration would slow labour supply and potential GDP. These negatives will likely outweigh any GDP gains from deregulation outside the EU or the redirection of EU budget transfers.”
A spokesman for the group said Brexit had come at a fragile time for the world economy, with US growth weighed down by external shocks, but added that the short-term impact was likely to be manageable.
“The trade exposures of US and Asian economies to the UK economy are small,” Fitch explained. “The eurozone will suffer a larger shock from weaker UK demand and the depreciation of the pound, but for the block as a whole, growth adjustments will likely be significantly smaller than for the UK.”
