The weak pound and rising prices will quickly make motoring more expensive. Andy Palmer explains how the car industry will be impacted in the longer term
Last year, I appeared on BBC’s Question Time sitting next to soon-to-be Chancellor, Kwasi Kwarteng. Amidst a discussion about how the UK economy responds to the shock of Covid, I made the point to Kwarteng and others on the panel that “there is no magic money tree” and that cheap cash won’t last forever.
Since then I can only assume the Chancellor has spent a lot of time in his garden and has stumbled upon a sparkling great oak with twenty-pound notes for leaves! The ‘fiscal event’ (read budget!) last Friday sent ripples through the markets with a tax cut package costing the exchequer a whopping £45billion.
Shortly after the Chancellor left the chamber of the House of Commons, the pound slid to a 37-year low against the dollar and the FTSE dropped more than 2 per cent.
Watching news coverage of the economic fallout has been headache-inducing for many. Gilts, bonds and yields are terms usually reserved for boardrooms and glass towers in financial capitals, but they have a real-world impact on each and every one of us. Mortgage rates, pension pots and the cost of living are all in flux.
For those of us who work in the auto industry, there are also question marks about what this all means for our sector – already struggling to get to grips with crippling supply chain issues and the EV transformation.
In short, the weakening of the pound is unlikely to have an immediate, short-term impact on the auto industry. This is for multiple reasons: the first is hedging.
This is the process of investors seeking to offset potential losses with a companion investment that effectively ‘counters’ the risky investment. This gives some protection and stability to the markets that should take the immediate sting out of the wider economic consequences. For now.
Then there is the intervention from the Bank of England. The central bank has already indicated they will buy £65bn worth of UK government bonds to which the markets responded positively and pushed the pound’s value slightly higher when announced. The Bank is also expected to raise interest rates again at their next scheduled meeting in November, pushing up the cost of borrowing, in an attempt to control inflation caused by the proposed tax cuts.
But a weak pound is not all bad news for the auto industry. Cars purchased in sterling (effectively, those manufactured in the UK) are much cheaper for markets purchasing in Euros, Dollars and other stronger currencies. That spells good news for exporters. If the pound’s weakness is going to be sustained for the long-term, it’s vital that we make the most of this opportunity by ensuring we have the domestic gigafactories in the UK to become a leading exporting nation once again.
If this is the long-term reality of Britain, we also need to face up to the fact that a weak pound means motoring is likely to get more expensive. Buying cars, parts and fuel from overseas will become more expensive as a result of the pound being weaker abroad.
Thankfully, there is a level of insulation amongst this being an immediate concern as many manufacturers will hold substantial stocks of inventory on hand. But if the economic situation does not improve in the long-term, this will soon become a critical challenge for the industry that needs to be addressed.
Overall, the economic headlines are worrying, but, for the auto industry, we are unlikely to see a huge impact immediately. The challenge now is for automakers to insulate against rising costs due to a weakness in the pound and the government to provide markets with confidence that Britain is a good place to do business. They can start by pruning that money tree.