Collapsing Pound could spell trouble

We’ve been doing quite well recently at work, financially we’ve been doing okay and have a fair bit of work in the pipeline over the next few months. We’ve actually recruited 5 people in the past month alone to help develop the business and deal with our workload. We are also trying to expand into new areas so that we have more opportunities to develop the business and weather the oncoming recession.

However, what no-one can predict is what business will be like in 6-12 months time. Every day there is news of some big company laying off thousands of jobs; HSBC, BT, Virgin Media, RBS have all announced big job losses and these are all customers of ours.

Something that is very worrying is the collapse in the value of the pound. Yesterday it hit $1.50 and today it closed at $1.487. Over the past 12 months the value of the pound vs the dollar has declined by more than 25%:

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You might think "So what?", but the problem is that most of our suppliers are US companies and price their goods in dollars. So when we buy product from them to resell in the UK we have to convert sterling to dollars, and with the collapse in sterling, it obviously costs us more.

You might think that we can just put our prices up to compensate, which we can, although that might make us less competitive, but the decline has been so rapid recently, that if an order was placed on us today using pricing that was issued in a quote 30 days ago, it would cost us about 15-20% more to buy the product, yet we would still have to honour the price we quoted to the customer. We have to absorb this price increase and it wipes out a massive chunk of our margin – that is money that is used to pay staff wages, company overheads and profit.

If we are seeing this happen to our business, then you can bet it will also filter through into the wider economy. The problem is not just related to the dollar, sterling has been losing value against the Euro too:

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So if it costs more for importers to buy goods from manufacturers, they will have to raise the prices they charge their customers, and that will begin to push inflation up again. With oil (and gas) priced in dollars, it will cost more pounds sterling to buy it, and that could lead to rising prices at the pumps (and energy bills).

Some pundits seem to be forecasting a drop in inflation due to lower consumer demand, but maybe that will not materialise due to the falling value of the pound, leaving us with high(er) inflation and a stagnating economy?

The next 6-12 months could prove to be very tough indeed.

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