Boris Johnson resigns

On 7 July 2022 Boris Johnson announced his resignation as Conservative leader after a wave of resignations in his government. The country faced the highest inflation in decades without a clear course. The political crisis thus came at the worst possible moment: when an executive able to take economic decisions with stability was most needed.

Although it is another country’s domestic politics, the episode matters beyond its borders. The United Kingdom is one of Europe’s largest economies, a significant trading partner and a regular destination for Spanish companies, and its political situation affects market confidence, the value of its currency and the decisions of those who trade or invest there. Following it is part of good risk management.

A government without a clear course

With the prime minister resigning as party leader and a government overwhelmed by resignations, major economic decisions hung in the balance. And the country was at the same time facing the highest inflation in decades, which would have called for quick, coherent responses. A country’s economic policy depends on teams and timetables; when they are interrupted, companies lose visibility.

A period of political transition usually slows major decisions: reforms are postponed, budgets are revised and companies have more difficulty knowing which rules will apply in the future. When, in addition, the economy needs measures to contain prices and protect households, the lack of direction has a real cost that shows in confidence and in markets. Periods of that kind tend to increase the volatility of the currency and of markets, though the intensity of each episode is hard to foresee.

The United Kingdom and our economy

The United Kingdom is a key market for Spanish tourism and exports. Many Catalan and Spanish companies sell there, or depend on British travellers, so what happens in London affects their results, even without a presence there.

For a hotel, a restaurant, a shop or an exporting company, the health of the British economy and the mood of its consumers influence demand each season. Political uncertainty that drags on can affect travel and purchasing decisions. That is why it is useful to know what share of turnover comes from that market and what room there is to offset a fall. A practical way to gauge it is to calculate what share of bookings, income or visits comes from British customers and what would happen if that share fell by a quarter.

Sterling and travellers’ spending

Its political instability, which would worsen in the autumn, had direct effects on sterling and on its travellers’ spending. A weak currency reduces the purchasing power of those who travel or import, and companies with income in pounds must watch their exchange-rate exposure and consider whether they need to hedge it. Payments and receipts in pounds can be planned with more certainty if the dates and amounts are known in advance.

Hedging currency risk means fixing in advance the rate at which future income or payments will be converted, in exchange for giving up a possible gain and bearing a cost. It does not always pay, and it depends on the volume, the term and each company’s tolerance for risk. The important thing is to know how exposed one is and to have consciously decided what to do about it. Anyone who cannot or does not want to hedge can at least adjust prices, diversify markets or keep a cash cushion that absorbs the swings.

The politics of a key market is a risk factor, even if it does not appear on the balance sheet.

This article is general information. It is not legal, tax or investment advice, and it does not take anyone’s particular circumstances into account.