As a Zimbabwean who has lived in London for 14 years, while legally working on an Irish passport, I was firmly in the Remain camp during this year’s EU referendum. I didn’t want to leave Europe and I still don’t want to (although fortuitously, as an Irish passport holder, technically I won’t have to).
However, as a UK resident I am fully resigned to Brexit, but optimistically hoping that we are in for a “soft” rather than a “hard” landing. Yet chancellor Philip Hammond indicated at the recent Tory party conference that we should be prepared for a bumpy ride, and the City and global markets took him at his word.
The pound has fallen to its lowest level in 31 years in the past few days, as fears grow that Britain is heading for a public, messy “Brangelina-style” divorce full of recriminations from Europe. The most bearish forecasts predict that sterling could fall to $1.10 and reach parity with the euro by the end of next year. At one point sterling fell 6% against the dollar in a two-minute “flash crash” period and it has been volatile ever since.
If this plunge in sterling is prolonged it is going to have a significant impact across corporate Britain, from positively boosting the sterling value of listed UK companies’ overseas earnings to negatively affecting businesses facing rising import costs, particularly for goods sourced in US dollars.
Britain’s retail sector, which also happens to be the largest occupier of UK property space, could be especially hard hit, with fashion businesses particularly vulnerable given that they buy their garments in dollars but sell the wares in sterling.
This was demonstrated quite dramatically last week when Sports Direct was forced to cut its full-year earnings guidance again, for the second time in a month, following the slump in the value of the pound. It said its earnings for the year could be as much as £35m lower than the £300m forecast last month, which was based on an exchange rate of $1.30 to the pound.
Other retail businesses may have more effective currency hedging arrangements in place until early next year, but after that the picture is more uncertain. Andy Street, the outgoing managing director of John Lewis, has warned that two-thirds of the goods it sells in its stores are imported. If the pound continues to fall next year, retailers will have to decide whether to absorb these higher import costs themselves (a situation which cannot last indefinitely) or push up prices – potentially leading to an inflationary environment.
Lord Wolfson of Aspley Guise, chief executive of Next, has already said the cost of its clothes could rise by as much as 5% from January and has indicated that he could push up prices for shoppers rather than take the hit on higher costs.
Although there are many self-help measures that retailers can take to mitigate these rising costs, it is likely that inflation is coming. If prices rise then both consumer sentiment and spending levels could drop, which is worrying as these are key factors that influence companies’ decision-making when it comes to investing in their businesses and creating new jobs.
Any slowdown in high street spending will not only have a knock-on effect on retailers but will also eventually take a toll on landlords of retail property too. Demand for space could fall, putting rents in an already competitive marketplace under pressure. Since the last recession landlords have made strides in providing more flexible lease options for retailers but they could have to become even more accommodating, particularly in secondary locations.
Retailers are prone to complaining but this time it is perhaps with good reason, as they were already facing serious headwinds from rising business rates and higher wage costs before sterling went into freefall. There is also the looming threat of an EU tariff to consider if Britain’s “conscious uncoupling” from Europe does not lead to favourable trade agreements.
Britain is facing its biggest economic challenge since the 2008 recession and at the moment retailers, and ultimately their landlords, seem among the most exposed.
Deirdre Hipwell is retail and M&A editor at The Times
