Nail Farmer asks, can global markets recover from the challenges of the current economic crisis?
At the beginning of the year, economic recovery after the ravages of the Covid-19 pandemic seemed feasible. Hopes that world economies would start to grow again seemed realistic. Now in autumn 2022, growth across the world has ground to a halt. Rising commodity prices, supply chain disruption and massive hikes in the costs of energy have all lead to rampant inflation. The consequences of the war in Ukraine have caused food prices to rise even further and threatened the supply of vital commodities. Russia and Ukraine produce over 25 percent of the world`s wheat between them. Russia is also a significant producer of oil and gas. Sanctions on commodity imports from Russia have added to the inflationary pressures across the whole world.
If consumers are required to spend more on food and fuel, this results in less money being available to spend on other goods and services.
The number of UK people who skip meals or use food banks has leapt in the last year according to the Food Standards Agency (FSA). As a result, economic growth levels for 2023 and 2024 have been scaled back. A UK recession may have just been averted in the second quarter of the year, with revised data showing GDP expanded by 0.2 percent, but the economy still faces a major downturn on the back of soaring interest rates. Put simply, there is more misery to come. The (now former) Chancellor`s ill-conceived mini-budget has plunged the UK economy and world markets into disarray, with the IMF rebuking him for his actions. Consumers are now seriously worried about their future and their livelihoods.
Prior to the disastrous intervention by the Kwasi Kwarteng on 23 September, reduced consumer spending and the rising cost of living was slowing Western markets down. Inflation was already in the system, caused by shortages of key components and products. This had already resulted in higher prices, which will now rise even further in the remainder of 2022 and 2023. FMCG businesses need to pass on costs to recover some of the losses suffered during the pandemic, otherwise risk going out of business – particularly so in the case of the bricks and mortar high street retailers and also the manufacturing industry, which is heavily dependent on expensive energy to maintain production.
Earlier in the year the IMF estimated UK growth of 3.7 percent overall in 2022 and 1.2 percent in 2023. Annual output next year is now likely to fall by 0.6 percent. Indeed, well before the 23 September mini-budget, Goldman Sachs forecast the UK recession could last until 2024. Whether this occurs or not, the country is still at the bottom of the growth league table for the G7 Group of Nations. Whatever your political views, the UK is facing a crisis as a result of misguided economic interventions. Markets and economies do not like political turbulence. The UK has had too much of this recently and there is likely to be more to come.
While the picture is bad enough for the Western World, emerging markets are faring even worse. The World Food Program (WFP) estimates that someone living in New Delhi, India, spends on average 3 percent of their daily income on food, in contrast with just 0.6 percent of someone living in New York. Covid-19 took a heavy toll on emerging markets. This is a result of several factors, not least of all because a larger proportion of their output is based on manufacturing. When national governments` imposed restrictions on social contact, workers could not work from home as easily as in Western countries. As a result, many companies stopped production altogether, with dramatic effect. However, now the impact is being reversed. Manufacturing is starting to recover and production lines are reopening. This is particularly beneficial as the war in Ukraine is continuing to take its toll on poorer countries in terms of supply of basic food commodities such as grain. However, supplies from Ukraine are now slowly starting to come through to Middle Eastern and African countries. Whilst the picture is extremely serious, it is not all doom and gloom. Emerging countries that export large amounts of commodities are benefitting from price rises in global markets – others will feel the negative effects of food price inflation. Whereas for Western economies all these effects are likely to mean higher food prices for a considerable time to come.
The current state of the UK consumer goods industry
It is estimated that around 10-15 percent of businesses are still suffering labour shortages, which affect the level at which they can operate. This should not come as a surprise for anyone within the retail sector, with food service businesses particularly hardest hit. Rising inflation, the war in Ukraine, and the resulting energy and cost of living crisis, plus a weak pound have all impacted massively on the food sector.
Retail sales are normally regarded as a leading indicator of macro-economic domestic economy patterns. Two consecutive quarters of falling GDP equate to a recession. The UK narrowly avoided this in the second quarter of 2022 but the outlook for the remainder of the year and 2023 is grim.
Hope for the food sector?
It has often been believed, even in recessionary times, that consumers are reluctant to spend less overall on food. However, according to the twice monthly survey by the UK Office for National Statistics published on 22 July 2022, exactly half of adults said they were buying less in their food shop. The picture has deteriorated in recent months, with anecdotal stories of families eating only one meal a day and often going without breakfast. Trading down is also occurring by middle-class consumers. Occasional visits to cheaper retailers such as Aldi and Lidl, by those who normally shop in Waitrose or Marks and Spencer, is now considered to be the norm. As of September, Aldi is now the fourth largest supermarket in the UK, displacing Morrison`s from this position. Eating out, cinema or theatre visits may decline, travel and big-ticket purchases such as a new car might also be deferred, but food purchases will continue, albeit at a reduced level. Put simply, people have to eat and drink.
This means that the current crisis offers opportunities for food manufacturers. Companies may believe that now is an excellent opportunity to invest in new equipment and services, before interest rates go any higher, which they undoubtedly will.
However, a salutary lesson lies in the case of North Yorkshire pie brand Vale of Mowbray, which invested £4 million in its latest expansion project in June 2022.
The money was intended to fund new factory machinery which would boost Scotch Egg production and pave the way for additions to the company`s product portfolio. Fast forward to 28 September 2022 and the company announced it was entering administration. The family business cited financial challenges in recent years due to rising raw material input prices, increasing energy costs and sector-wide recruitment challenges as the major drivers behind its administration. Vale of Mowbray employed 219 staff. 171 roles were made redundant upon appointment of the administrators. Such is the precarious nature of smaller food businesses at the present time.
On a more positive note, Jones Village Bakery in Wrexham announced in May 2022 the installation of a new £ 16 million production line. The company described the investment as a combination of the latest technology and traditional craft baking skills. The business is to be applauded for its forward thinking. It is to be hoped the investments will yield profitable results.
Export led opportunities for UK consumer goods companies
As a result of Brexit the UK is now a country free to negotiate its own trade deals. This self-evident statement conceals some basic facts. The USA is a major example of where a free trade deal is essential for the future success of the consumer goods industry, but this is still some way off. However, opening new markets is not an overnight story of simply securing free trade agreements. The need to build relationships between exporters and importers can be a long and torturous process.
The world of 2023 is likely to be complex and new trading patterns are uncertain. The war in Ukraine is likely to disrupt global markets for some considerable time. The need to secure new export markets for consumer goods producers is vital. It should not be beyond the powers of politicians to lead the way in this and achieve a deal with the USA, the world`s largest economy. Other trade deals negotiated so far have had minimal impact on GDP.
The future and ESG issues
I have painted a picture of an economy which is facing huge challenges. I believe the consumer goods sector can weather the current storm and come out of this turbulent period revitalized and ready to move forward with confidence. But this is not going to happen without considerable pain.
In all of this we must never lose sight of the importance of sustainability and environmental issues. ESG factors are increasingly important for the consumer goods industry. They should not be marginalised as a result of the current economic crisis. Companies are, more than ever before, being assessed for their performance in environmental, social and governance areas. Consumer goods producers have got to be more transparent and open about their claims of environmental competence, to avoid claims of greenwashing. The future of our planet is at stake and the industry must do more over the coming years to provide direction and leadership in this vital area.