The latest Global Trade Barometer from World First shows a significant slowdown in international trading, as UK SMEs transfer 17 per cent less on average per currency transaction in Q1 2017 versus Q4 2016 – a fall from £48,000 to just £39,000.
In other signs of businesses halting international trade, two in three (64 per cent) SMEs say they did not make a foreign currency transaction in Q1 2017, rising significantly from 28 per cent in Q4 2016.
The drop in SMEs’ confidence has been compounded by currency volatility, a third (30 per cent) say they feel the negative impact of exchange rate movements in the last quarter. SMEs are also concerned about political and economic factors in the months ahead. One in five (22 per cent) are worried about rises in inflation negatively impacting their business and the same proportion (22 per cent) show concerns over a fall in consumer spending.
Top five business concerns shared by UK SMEs
Rise in inflation (22 per cent), fall in consumer spending (22 per cent), currency volatility (19 per cent), change in government policies (18 per cent) and increase in business rates (16 per cent).
Jeremy Cook, chief economist at World First, comments, ‘The fall in trading by UK SMEs clearly shows us that SMEs are doing less trade abroad. Higher costs of importing materials and squeezed margins are seeing businesses pull back from international trade. Whilst fewer transactions of less value might be less risky for businesses, it could have a negative impact for the UK economy going forward.’
SMEs plan for less international trade
The decline in international trading looks set to continue with only a quarter (25 per cent) of SMEs planning to export in the next quarter, compared to a third (33 per cent) who currently do so. Declines are expected across major regions and with major trading countries.
Brexit negotiations cause further headache for UK SMEs
With Article 50 triggered, more than a third (35 per cent) of SMEs are concerned that the resulting impact on currency rates will negatively affect their business – more than a tenth (12 per cent) are very concerned. Additionally, a quarter (26 per cent) worry that it will make it more difficult for their business to manage its currency risks – 9 per cent are very concerned.
Risk of further shocks as SMEs fail to protect themselves
Despite expectations of further volatility, three in five (59 per cent) of UK SMEs have no plans to protect themselves against future currency volatility. This is despite 37 per cent of SMEs saying that a further fall in sterling will negatively impact their business.
World First data also shows that SMEs are doing less to protect themselves from currency volatility. The popularity of currency hedging fell by nine per cent in Q1 as less forward contracts were booked.
In particular, there was a significant decline in the appetite of UK SMEs for short term contracts (one month or less) with a 25 per cent Q-o-Q and 17 per cent Y-o-Y reduction in volume.
Cook adds, ‘The volatility of foreign exchange markets over the past twelve months, combined with the political and economic uncertainty has made the task of approaching foreign exchange markets with clarity and confidence even more difficult.
‘Rather than address the issue of currency volatility, many SMEs seem to be burying their heads in the sand. The lack of forward planning amongst SMEs is leaving them susceptible to future shocks that could have a significant impact to their bottom line – we only need to look towards June’s UK general election as another potential flash point.’
Further reading on international trading
