While it’s been linked to the referendum decision in June triggering Brexit, the fall in the value of sterling wasn’t caused by that alone. The currency was over-valued for some time and didn’t reflect the true state of the UK economy and its reliance on the volatile service sector for growth. The Brexit decision undermined already fragile confidence, and what we’ve seen with sterling since June is a readjustment back to a more ‘normal’ rate, against the euro in particular.
Whatever the reasons, the fall in the currency has been good news for farmers, not least because of the boost it will deliver to the value of CAP payments when the conversion rate is calculated at the end of September. While that will help cash flows in a year when that’s needed, what we’re seeing is a return of the conversion calculation to where it was a few years ago. This isn’t a windfall, but a more normal payment situation. At the same time agriculture has been helped by currency making exports more competitive. This applies in particular to products exposed to export markets and has brought a double bonus, since the sterling rate has improved export prospects, just as global commodity prices for some key agricultural commodities, including meat and dairy, are improving.
This all adds up to a false sense of security about the impact of Brexit. Read the financial press on a daily basis and you’ll see reports in the same newspaper setting out why Brexit is the best or worst thing ever to happen to the UK economy.
The reality is that no-one knows what the impact will be. On top of that the UK economy doesn’t exist in isolation, and it’s clear the eurozone economy is facing equally uncertain times. The German economy in particular is weakening and stalling pros-pects of the eurozone moving back into growth.
No matter if you were an enthusiastic Leave supporter or a Remain advocate, we all want certainty about the economic future, but that’s not going to happen soon. Currency and equity markets are volatile, and with speculation intense about growth and how soon, or indeed if, trade deals will be done, markets react to every twist and turn. This comes when global markets are already volatile and driven by speculation about interest rates in the United States – with the additional uncertainty there of presidential elections.
It’s difficult to work out how this will affect individual business sectors. Over the summer the retail sector confounded forecasts by delivering growth. This suggests people have got over their initial fears about the impact of Brexit.
However, confidence is still very fragile, and while the Bank of England cut interest rates to help drive investment and consumer spending, there are no signs of those record low rates being reflected in commercial or personal loan rates.
What is certain is that this has destroyed the hopes of a generation of pensioners and savers. In the past they were not afraid to spend, but they are now because their incomes are under pressure, with no hope of recovery.
As to the impact on farming, there are big unknowns about the future of support and trade. Confidence isn’t going to return to the UK economy any time soon, and that will keep sterling weak, which is good for agriculture. At the same time farming is a basic manufacturing industry, using indigenous resources. That makes it a sector less likely to enjoy the good times of economic growth, but it’s a core industry that’s more immune than many others to a downturn in consumer confidence.