Global food production is coming under severe stress as war in Ukraine adds to pandemic-related shocks. Meanwhile, countries also need to curb dependence on fossil fuels, as the UK government outlined its energy strategy putting offshore wind and nuclear power at the centre of policy. Businesses are grappling with challenges from surging prices to supply chain disruptions and, with inflation rates probably jumping again this week, that will likely continue to be the case.
Food for thought. The outbreak of war between Russia and Ukraine pushed global food prices to a record high in March. Prices jumped by 12.6% in just a month, with global wheat prices surging almost one-fifth.Global food prices have now increased by 34% y/y and 67% in just two years. Hostilities between the two agricultural superpowers has led to supply chain disruption, preventing key commodity exports via the Black Sea. With conflict still raging, planting this years’ crops will prove difficult, further exacerbating shortages. Ukraine’s top six crops cover 59 million hectares – equivalent to the size of the UK. The seeds of a global food crisis have been sown. The World Bank has warned that higher food prices will hit low and middle-income countries hardest, pushing millions into poverty.
Bearing the brunt. Supply-chain challenges, rising costs, and labour shortages have all led to an increase in UK food and beverage prices. As of last month, 60% of UK food and drink firms were adversely affected by the energy crisis, compared to just 38% across all sectors. Real estate and IT were least affected. Food and drink businesses have also been impacted more than other sectors following Brexit: experiencing additional transport costs and increased red tape. On these two measures, twice as many are adversely affected than UK businesses as a whole.
Supply-chain fiasco and more. Continuing on the same theme…over a quarter of businesses experienced first-hand global supply chain disruption over the last month, rising to 52% among manufacturers with 10 or more employees. What’s worse, trading difficulties are acute: more than one in five also report lower-than-normal levels of exports, with additional paperwork, and new customer duties among the top challenges facing exporters. To add to this, a Bank of England study finds that nearly half of UK businesses expect Russia’s invasion of Ukraine to lower sales, with higher prices dampening investment intentions.
Challenging. Mounting costs and recruitment difficulties are the key headwinds facing local firms in the Northern Ireland Chamber of Commerce Q1 2022 survey. Inflation is a concern for 9 out of 10 respondents while the same proportion of firms who are hiring – which is two-thirds of all firms – are experiencing recruitment difficulties. These challenges have dented manufacturers confidence despite continued growth in sales and jobs. Three key indicators turned negative in Q1 2022 – cash flow, confidence in profitability and capital investment. The service sector saw its recovery move up a gear in Q1 but it too faces the twin challenges of skills shortages and cost pressures.
Brexit’s bill Brexit hasn’t been front page headlines for a while but its impact continues to be felt. New arrangements came into place on 1st January 2021 including the NI Protocol. As of Q1 2022 two-thirds of local firms, according to the NI Chamber, said they had adapted to the new regime but 29% are still experiencing difficulties. New arrangements also come with new costs. Almost half of NI firms have had to use new / existing staff and /or pay for external support to cope. Almost 1 in 3 estimate that their business costs have risen by more than 5% as a result of the UK’s EU exit with 16% citing cost increases in excess of 10%.
Stressed. As concerns over escalating food costs of mount, last week signalled the start of the most acute part of the UK’s cost of living crisis as energy prices jumped by more than half overnight, pushing 5 million English households into fuel stress (where they spend more than 10 per cent of disposable incomes on energy bills). Against a backdrop of the highest inflation rate in 40 years, all indicators point to the price cap rising again in October, just as winter bites and households increase their energy use. A likely increase to £2,500 would see another 2.5 million households in England fall into fuel stress. Fuel stress continues to be more acute amongst poorer households, those in the North and Midlands, and those in energy-inefficient homes.
Under pressure. Like the curate’s egg, real-time economic indicators are only good in parts.The more palatable morsels are card spending and eating out, both up by 6% in the latest week. Yet we took fewer trips out (the weather hasn’t helped) and worries seem to hang heavy in the air. The number of new VAT reporters (start-ups) dropped by 12% in March. Firms are anxious about rising cost pressures and energy prices. Not surprising, given wholesales gas price rose by 17% in the week to the 3rd April, up 444% on the year before.
Starting point matters. The UK economy entered 2022 dealing with very high imported inflation and a tight labour market, concluded Bank of England Deputy Governor Jon Cunliffe. The Russian invasion of Ukraine will intensify and prolong the inflationary surge, further tightening the household income squeeze. The BoE’s latest calculations suggest an impact of c.2 ppt higher inflation and c.1 ppt lower level of GDP relative to it’s February forecast. What does this mean for future policy? The Bank must now balance two very different risks: ensuring inflationary pressures do not become embedded in the domestic economy, whilst not amplifying the impact of the income squeeze by tightening prematurely. For Cunliffe, a psychology of persistently higher inflation is yet to emerge.
High and higher. Rising global inflation is a big worry for central bankers and policymakers. In February, inflation in OECD countries hit 7.7%, up from 1.7% a year ago and the highest rate since 1990. And that was even before price-pressures from Russia’s invasion of Ukraine. While energy continued to boost inflation for more than 30 OECD countries, annual food price inflation also rose edged up to 8.6% in February from 3.0% a year earlier, hitting poorer households the hardest. Price increases were documented in all G7 economies, with Italy and France registering the fastest acceleration (0.9% and 0.8% m/m), while Turkey reported the fastest pace across all OECD countries.
It’s the emissions, stupid. The UN’s climate change committee, the Intergovernmental Panel on Climate Change (IPCC), delivered its latest assessment of what the world needs to do to combat climate change. As emissions increase, yet again it lays bare some of the broken promises and wishful thinking that still characterises countries’ approaches. But it also set out a roadmap of what action is necessary to keep 1.5C alive. It’s a simple plan: massively ramping up wind and solar generation, electrifying everything, modest changes to diets and, more controversially, scaling attempts to capture and store carbon. If done right, and right now, these actions could still limit warming to 1.5C. But global emissions need to peak before 2025 if this is to be feasible.