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By Alicia Nicholls
Winter is coming! And never within the Game of Thrones sense. The massive news in currency markets on Monday, September 26, 2022 was the British pound (GBP)’s record slump against the US dollar (USD). It seems unfathomable now that years ago one UK pound was price some 2 USD. Then early that Monday morning in September, the pound dropped to the equivalent of US $1.03 at one point, almost reaching parity with the greenback before rebounding barely within the afternoon and recovering somewhat since then. Nevertheless, that day was the closest in history that the GBP/USD rate has come to parity and marks one of the crucial volatile periods Sterling has experienced for the reason that turmoil of the Brexit referendum in June 2016 and its aftermath.
But what does this volatility of the UK pound and UK economic developments more generally mean for the Caribbean? This SRC Trading Thoughts discusses this state of affairs and potential implications for the Caribbean’s tourism and trade with certainly one of its major trading partners.
What accounts for the pound’s depreciation?
One in every of the only answers for the pound’s depreciation against the dollar is that the latter is experiencing strong appreciation against other world currencies as often happens when there may be global uncertainty leading investors to retreat to the security of the US dollar. But several other aspects, including recent political and economic events within the UK, also explain the pound’s most up-to-date depreciation.
After emerging victorious within the race to exchange then disgraced Prime Minister Boris Johnson as Conservative Party leader, current UK Prime Minister Liz Truss has inherited a UK economy getting ready to recession if the Bank of England’s projections of two consecutive quarters of negative GDP are proven true. Some pundits, just like the economists at S&P Global Rankings, say the UK economy is already in a full recession. Volatile energy prices fueled by the Russia-Ukraine conflict has spiked inflation in major world economies, including the UK. Though global energy prices have dropped somewhat in recent weeks, UK households face a winter with rising costs of food and gas diminishing their purchasing power. Inflation within the UK is currently running at 9.9% as reported by the UK Office of National Statistics (as at August 2022), which is a dip from July’s 10.1% but stays elevated. Furthermore, the decline in global oil prices is likely to be short-lived. At its just-concluded Vienna meeting, the Organisation of the Petroleum Exporting Countries plus Russia (OPEC+) announced its decision to chop every day oil production by 2 million barrels which could drive up oil prices once more, with concomitant consequences for global inflation.
To chill inflation, the Bank of England (BoE) has raised its key rate of interest to 2.25%, which is the best level for the reason that 2008/2009 global financial crisis. It follows the US Federal Reserve’s third straight significant rate hike on September 21 to do the identical for the US economy. The BoE has further said in its statement that it “won’t hesitate to vary rates of interest by as much as needed to return inflation to the two percent goal sustainably within the medium term, in keeping with its remit”.
On September 23, 2022, the newly appointed UK Chancellor of the Exchequer, Kwasi Kwarteng delivered a ‘mini-budget’ wherein he announced several fiscal measures to assist UK households mitigate the consequences of spiraling prices. The principal problem, nonetheless, was the massive tax cuts announced which were largely unfunded and included a proposed scrapping of the highest personal income tax rate of 45% for the best income earners, subsequently benefiting the wealthiest taxpayers in the course of a price of living crisis. Not only were the proposed tax cuts deeply unpopular within the UK but it surely rattled financial markets, accounting for that Monday’s unprecedented drop in Sterling’s value and likewise spiking rates for new mortgages and remortgages within the UK for the primary time since 2008.
The move was also strongly condemned internationally. The International Monetary Fund (IMF) in a press release issued on September 27, 2022 made the bizarre step of publicly critiquing the policy proposals of a serious G7 country and urging a “re-evaluation” of the proposed policies. On September 28 the BoE intervened to buy UK bonds so as to restore stability and calm markets following a historic sell-off of UK government bonds by investors within the wake of the policy announcements. On October 3 2022, the Chancellor subsequently announced a reversal of the Government’s proposed removal of the highest personal income tax rate of 45%. The pound has since regained some value but as at Wednesday, October 5, 2022 it stays at a low rate of 1 GBP to $1.13 USD.
Implications for the Caribbean
The Pound’s record low rates are a possible mixed bag for the Caribbean. Starting with the positives, Caribbean Community (CARICOM) Member States imported US$596 million in goods from the UK in 2021 in keeping with ITC Trade Map data. Depending on the pricing terms of supplier contracts, Caribbean importers could find importing from the UK cheaper because of the stronger US dollar vis-à-vis the UK pound. Caribbean tourists to the UK and students pursuing studies in that country will find that their money will go further. Nevertheless, this gain is offset somewhat by the record inflation – the fastest rate in 4 a long time.
Now to the negatives. The UK is a number one tourism source marketplace for the Caribbean region and for some countries, like Barbados, is the largest source market. With the UK facing a winter of uncertainty, UK travellers, including those within the Caribbean diaspora, is likely to be less inclined to travel to the Caribbean region especially given the upper airfares. Furthermore, those like High Networth Individuals (HNWIs) who do resolve to travel, may also spend less because of diminished purchasing power which could adversely impact our countries’ tourism receipts. Pound volatility could also once more impact foreign direct investment in Caribbean countries’ second home markets wherein UK residents are among the many principal purchasers and renters of luxury accommodations.
Going forward?
The UK pound’s volatility just isn’t new for Caribbean traders, especially for the reason that Brexit events of June 2016. On the positive side, with a powerful US dollar and weak pound, UK goods and services (including travel to the UK) might be cheaper for a lot of Caribbean consumers within the near future, high airfares aside. Conversely, Caribbean exporters could see softening demand for his or her goods and services within the UK market given higher inflation and lower purchasing power of the typical UK consumer. Caribbean countries’ tourist arrivals and receipts from the UK is also adversely affected because of the typical UK consumer’s lower purchasing power.
No doubt, Caribbean tourism and trade authorities are assiduously monitoring these developments within the UK. This, like other shocks before, further reiterates the critical need for continued diversification of our mostly tourism-dependent economies and tourism source markets, including intensifying efforts to construct travel and trade links with Asia and Latin America and more recently, Africa. Winter is indeed coming and all of us should be prepared for the possible fall-out, in addition to any opportunities, developments within the UK economy might portend.
Alicia D. Nicholls, B.Sc., M.Sc., LL.B. is the Junior Research Fellow of the Shridath Ramphal Centre for International Trade Law, Policy & Services of The University of the West Indies, Cave Hill. Learn more concerning the SRC at www.shridathramphalcentre.com.
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