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27 September 2022
The devalued pound and what it means for advertising
Marketing in a recessionUnited Kingdom
Last week’s hastily arranged fiscal event hasn’t panned out the way its champions hoped as international financial markets lost confidence in the UK and investors shorted the £. But what does it all mean for advertising?
Just days ago, the UK’s latest Chancellor announced cuts to the top rate of tax income tax, increases in national insurance and corporation tax were cancelled, and a cap on banking bonuses was lifted at the same time as an enormously expensive energy price cap for households and businesses was put in place.
This was supposed to be good news
It’s easy to forget that the fiscal event was announced to make things better, and to provide a response to the energy price crisis that had threatened to hit people’s incomes so hard as to force a recession. But it’s the mix of heavy cuts (~£45bn) to government revenues and big increases in spending (over £100bn) to pay for the energy price fix at a time when borrowing is ludicrously expensive that has spooked the markets.
Two opposing directions
The response from the markets was disbelief and the sale of sterling. At one point the pound reached its lowest level since the UK’s currency became decimal in 1971. What’s more, investors have been selling off UK government debt; effectively, the country has become a pretty risky debtor to rely on.
“Investors seem inclined to regard the UK Conservative Party as a doomsday cult” commented Paul Donovan, UBS GWM, as reported by Global’s Lewis Goodall.
A bigger worry may revolve around the interest rate rises that the Bank of England might have to make in order to correct what a budget of unfunded tax cuts will do to an already inflationary environment – the UK’s central bank has already said it would “not hesitate” to increase interest rates.
That tension cuts to the heart of the issue: as fiscal policy attempts to accelerate into growth, monetary policy must go the other way. This will hurt most people, make credit harder to get, and will very likely cause havoc in the housing market. If mortgage repayments spiral, it won’t just be low-income consumers switching to private label or value ranges.
Any stabilisation of the pound on Tuesday appeared to be predicated on interest rates going up and on deep cuts to public services in order to balance the books. Effectively, for businesses as much as consumers, financing is going to be a lot more difficult and a lot more expensive.
Costs will increase further
Immediately, this will hit British companies in the form of rising import costs, especially in those sectors highly exposed to the US – the Financial Times highlights aviation, with many operational costs such as fuel paid in dollars, and drinks manufacturers that import lots of hops from the US. But really, any and all imports have become more expensive. As will any media bought and sold in dollars (or most non-sterling currencies for that matter).
Retail, meanwhile, sees a mixed bag. Overseas visitors will now enjoy VAT-free shopping, which alongside a weak pound, suggests that shops catering to international luxury shoppers are likely to do very well – as long as the costs of energy and imported goods don’t hit them too hard in the meantime.
There’s a similar possibility for the agency business – though this remains something of a fringe view – which is a strong exporter of both advertising and market research services, as it becomes more competitive (read, cheaper) to international buyers.
While that means some good news for vast multinational agencies capable of servicing international clients, it does little to help the smaller agencies catering to UK companies who are also feeling the ongoing strain on their costs and are watching their buyers tighten their belts.
At a macro level, the weakening pound could set the scene for some discounted takeovers by rich US companies, with certain hedge fund managers noting in comments to the Guardian that UK firms – especially those with strong brands – had retained their value even as the Nasdaq slowed.
“We can expect to see a wave of bids from overseas buyers for UK businesses. Their profits obviously won’t be worth as much in dollars, so asset-backed situations and brands are most valuable,” Richard Bernstein, founder of Crystal Amber, an asset management firm, noted.