Actual economic effects...

[Spinflight]

FTSE closed on Wednesday at 6138. Closed on Friday at 6138.

Long term borrowing rates have come down as brexit appeared more likely, 10yr ones from 2% down to 1.09% post brexit. Similarly all the European long term borrowing rates rose sharply. Lesson? We are a less risky and more credit worthy outside the EU than in.

One ratings agency did drop our credit worthiness, though oddly the last time they did was out of fear of Eurozone contagion. Seems completely at odds with the long term borrowing rates, which matter quite a great deal given our debts.

The pound dropped, quite significantly. It appears however that there was some 'unusual' activity in the market which forced it down whenever the Leave campaign polled well. To the extent of trying to sell it when there were no buyers.

Some people lost a great deal of money, probably dwarfing the millions contributed to the remain campaign, lets hope it was Goldman Sachs and JP Morgan. :)

But you should be compensate when you export. It cuts both ways.

More than compensated S raw materials only account for about 20% of total costs in the most dependent industries, and the fx gain applies to your profit margin too.

So really what we are saying it that yes the devaluing of the pound is good for manufacturing, but be aware that increased production costs my offset the increase.

Your raw materials 20% larry, if trading in dollars just went up by 9 cents on every dollar you spend, its large and means that the increase is not going to be that valable.

We also have to take into account the marshal learner condition, as stated for this to have an effect on the BOP exports and import need to be price elastic, as many of our imports are price inelastic and as previously stated are many of our exports, the desired effect on the BOP may not occur, and thus the benefits of the devalued pound will not be as beneficial to the UK economy as they could be.

It cuts both ways.

Yes, and no. It depends on what you are making and how much value you are adding. I think the experts but we haven't got to believe them now ,think that it should break even, but some will be losers and some will be winners.

What is BOP?

Balance Of Payments?

yup.

SmallFox,

www.bankofengland.co.uk/publications/Documents/quarterlybulletin/qb110401.pdf

The above study shows that, in general, a 10% fall in GBP causes a 4% rise in exports. That is not insignificant.

But not equal, is it? So the points about the ML effect are true, people don't suddenly start buying more financial services because they are cheaper

Also this study doesn't show the effect of increased material costs on firms.

Yes it does, it implicitly takes these into account. The 0.4 multiplier is across the entire export sector, so lower for services (as you correctly stated) BUT higher for other sectors.

Even for services though, it increases profitability as costs are GDP based and income I foreign currencies. This means greater potential pay for workers and greater corporation tax receipts.

Larry, a 10% reduction in prices leading to a 4% increase in exports gives us a PED coefficient of -0.4 which goes back to my point and says that demand for British exports is relatively price inelastic.

"But services trade is generally less sensitive to the exchange
rate and prices than goods trade. The main reason for that is
generally thought to be that services exporters compete on
the basis of product quality (and reputation) rather than price,
with a rise in relative prices sometimes indicating higher
quality"

From the report its self, backing my point that people don't buy more services because the price falls.

I didn't say it was a bad thing, or not valuable, but because as the report outlines that the UK does not have alternatives for supplies of certain raw materials this impacts production costs of manufacturing.

For services, because the demand does not increase very much, they make a bit of extra profit on the fall in value of currency, but again with a low multiplier the effect on the UK economy is minimal.

PED?

Price elasticity of demand or how responsive demand for a product is to a change in price.

Financial services tend be chosen because of their quality not their price so devaluation of the currency making them cheaper won't encourage that many more customers to buy.

When it comes to manufactured goods, say family cars for example this might encourage more people to buy. However it won't impact our luxury car market ( Bentley, Rolls, Aston and Morgan) because again people don't buy more of these if they are slightly cheaper.

Sorry for the use of jargon.

I actually recognise the jargon, just not the abbreviations. u follow your arguments better when I'm not guessing.

smallfox

People do not even need to buy more, international traded goods and services are often priced in USD and so selling at the same USD prices result in higher GBP profit (which is what our GDP is measured in).

The relative inelastic demands (to FX changes) for UK import is interesting. Looks like there are many who can continue to afford the Ferrari or Iphone even if the prices increase by 10%. Who are the ones who keep funding our trade deficit/BOP ?

Like I said I understood that the GBP profits would be higher, but was making the point regarding the suggested effect on BOP.

The thing with imports and elasticity is that there are such a variance of things that can effect it. With the Iphone I would say its likely to be the fact that many people consider it a necessity, to have the iphone, combined with the issue that most people buy it through a phone contract which takes up relatively small amounts of their monthly income over time.

The rest of the inelasticity of imports would be to do with the necessity factor, and the availability of domestic substitutes.

"international traded goods and services are often priced in USD"

Er... no they are not.

Internationally traded raw materials such as copper, steel, gold, oil etc are often priced in USD. These are nearly always what UK firms import, meaning their costs are now going to be higher.

Some UK firms might be in the habit of pricing their products destined for the EU market in EUR, but there are many others who prefer not to expose themselves to currency risk and sell in GBP. Their customers would not take kindly to being told that what cost GBP 200 last month now costs GBP 220 because the Pound tanked.

CoteDAzur

EUR to Eurozone customers in a lot of time yes. I haven't seen one exporter that price their export in GBP. To avoid currency risks, UK exporters hedge their exposures. International trade in GBP, if it happens at all, is miniscule.

Even if the goods/services are priced in GBP, the foreign customers shouldn't really be 'unhappy' as GBP220 would perhaps be the same as GBP200 in their currency pre valuation.

CoteDAzur

In 2014, 13% ($85bn) of UK imports are 'minerals' UK also exported $53.7bn of 'minerals' in that year. (Source: MIT Atlas trade data).

I do not think (though no data to back this) we export a lot of low value add items where the raw material costs are significant portions of the finish products (we won't survive with our cost structure).

Topsy.

One of our major exports are cars. 60% of the materials for the cars come from abroad and they obviously have significant material input costs, same goes for pharma products.

Also energy and transport costs increase as the pound lowers which can offset any devaluation of the pound.

"Even if the goods/services are priced in GBP, the foreign customers shouldn't really be 'unhappy' as GBP220 would perhaps be the same as GBP200 in their currency pre valuation."

It doesn't quite work that way. I don't know if your have experience of currency devaluation at all, but customers resist an upward hike in prices to varying degrees although lower exchange rate may mean they are the same in their own currency. That is why devaluation is good for exports, incidentally, as makes exports cheaper/ more attractive.

Meanwhile raw materials are more expensive. The result is more demand and hopefully better revenues, but squeezed profit margins.

Some exporters will come out alright. Others will not.

smallfox2002

Car - it is probably closer to 50% but I won't argue over the 60% quoted. However, for the 70% of the cars that are exported, the cars would be priced in EUR or USD. The material cost are likely to be hedged and the price of the raw materials have fluctuated far more than 10% month over month (in fact most raw materials are now over 50% cheaper in GBP compared to about 18 months ago).

Transport - fuel prices are heavily taxed, so the pass through effect is less than half. Again, crude prices is now over 50% lower than about 18 month ago.

CoteDAzur
I agree. some exporters will be all right, some will not be as it always have been. We need to look at the overall though.

I understand the high material inputs for Cars, but not Pharma. Surely in Pharma production the physical inputs are small and the intellectual property is great.

Intellectual property is an asset (in the Balance Sheet) not a Cost of Goods Sold (in the Income Statement), so not sure what you mean there.

Cote,

pharma has very low input costs as the profit margins, once the research has been done, are immense. Assuming the research is done in uk, these are Gbp costs. Devaluation will this go directly to the bottom line.