UK SMEs hold back on international trade as political uncertainty hits confidence

international trade

UK SMEs growth expectations slowed as political and economic uncertainty took its toll in Q2 according to a new Global Trade Barometer.

Nearly half of UK SMEs expect to see export volumes stall or even decline, one year on since the UK voted to leave the European Union. Of the 1,016 UK SMEs surveyed, only 30 per cent currently export, compared 52 per cent during the same period in 2016.

A third of SMEs stated they expect to see no business growth at all in 2017, and those expecting less than 5 per cent growth grew from 20 per cent in Q1 to 23 per cent in Q2. This gloomy forecast highlights the impact of the quarter’s uncertain political climate on SME exports and is another indication that the UK’s economy is set to slow.

UK SMEs expectations of business revenue growth

Q1 2017 Q2 2017
No Growth 31% 32%
Growth 10% or less 42% 50%
Growth of more than 10% 27% 18%

Whilst the volume of international trades has declined between 2016 and 2017, the value of average trades has grown by 16%; £44,000 in Q2 2017 compared to £38,000 in Q2 2016 suggesting that SMEs who have made smaller international trades historically have cut back bringing the average volume up.

Amid the changing political landscape, UK SMEs are also concerned about economic factors in the months ahead. One in four are worried about rises in inflation negatively impacting their business, with almost the same proportion show concerns over a fall in consumer spending.

Top 5 business concerns shared by UK SMEs

Fall in consumer spending 25%
Rise in inflation 24%
Currency volatility 20%
Change in government policies 20%
Cash flow 15%

Currency hedging behaviour suggests SMEs spooked by snap election and uncertain political backdrop

SMEs concerns translated into jitters around the June General Election with a step-change in SME currency hedges in Q2. There were clear spikes in trades placed following the announcement of the General Election, and then again once the result of a hung parliament was known. On the 18th April (the day the Election was called) there were 3.3 times more hedge trades placed than the Q2 daily average, while on the 7th June (Election Day), there were 2.5 times more hedge trades placed than the Q2 daily average.

The resulting volatility seen in markets has led SMEs to adopt short term hedge strategies. Whilst the number of hedge contracts carried out stayed the same, there was a sharp increase in shorter term hedges with contracts with terms of one month or less rising by 23 per cent whilst contacts with longer terms like a year or longer fell by 33 per cent.

Edward Hardy, Economist at WorldFirst said: “More than twelve months on from the EU referendum, it’s clear that SMEs across the UK are still wary of volatility in currency markets and the disruption they can bring. The data shows that while SMEs were still happy to hedge their foreign currency exposure in Q2, many are hesitant to commit to longer-term hedging contracts. Whilst this may be rooted in uncertainty over cashflow, sales forecasts or other financial commitments, it could also be a sign of the first strains in the relationship between UK SMEs and global trade.

While one quarter of data doesn’t make a trend, should this pattern continue, companies large and small will become more exposed to sharp fluctuations in currency markets. With Brexit talks still underway and September’s federal election in Germany, SMEs may find themselves unprotected just when they need protecting the most.”

Risk of further shocks as SMEs fail to protect themselves

Despite expectations of further volatility, two thirds of UK SMEs admitted to not knowing of, or having no strategy in place to protect themselves from future currency volatility, despite a third agreeing that their business has felt the negative impact of exchange rate movements. Furthermore, 38 per cent of respondents stated they were worried about the impact of currency volatility on their business, with 4 in 10 believing a fall in sterling would negatively affect their business.

Edward Hardy, Economist at World First comments: “The currency markets are risky business at the moment and SMEs importing or exporting to other markets are very exposed given the sort of swings we’ve seen over the last year and a half. As a third of SMEs have already felt the sting of currency movements in the last quarter, it is paramount that business owners get a currency strategy in place that offers them the flexibility to grow their business as we head towards the tail end of 2017.”