International Outlook – Economics and Politics
2016 has been a very turbulent year…………..
Brexit
In June this year the UK voted to leave the EU. The main effect so far has been the drop in the value of GBP versus both the USD and EUR. We sell mostly in USD or EUR enabling us to remain competitive.
The outlook in the UK is one of uncertainty. The Brexit process will be long. Import costs are increasing due to the fall in sterling. This will result in an increase in UK inflation. This could lead to a rise in UK interest rates (that will benefit us). Due to uncertainty as to whether the UK will remain in the EU single market investment in the UK by both UK companies and inward investment has mostly stopped or been put on hold. As investment stops; the pound will drop further because trade together with investment capital flows must balance.
Exporters will be OK. Deep sea exporters like us will gain and if the UK eventually agrees trade deals with USA etc then sales will further increase. If the UK leaves the EU single market then sales to the EU will continue because the fall in the value of GBP will more than compensate for EU import tariffs. Importers are under cost pressure and that will only get worse. They will be forced to pass on these costs so inflation and interest rates will go up. Logically import substitution should occur but time will tell.
USA – President Elect Trump
In early November Trump was elected president to start on 20th Jan ’17. This was the second major shock of the year.
Trump has stated he will borrow USD 1 Trillion and invest this in USA infrastructure and he says he will reduce tax rates. So far the effect has been to increase the value of the dollar a bit, the Dow Jones stock market is up but the big effect is the sharp fall in the price of bonds and thus an increase in yields resulting in the forecast of higher USA interest rates. This policy will suck One Trillion USD out of the world market! Trump is also planning to force USA companies to repatriate overseas dollar holdings. The combination of these factors will make access to US Dollars in the rest of the world tight and very difficult in the highly indebted developing world – our trading area.
Conclusion
So I conclude that in our markets overall demand will drop but for us not much change as we supply essential raw materials where demand is inelastic. However credit control will become even more critical. For the forthcoming year – Overall profit: little change.
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