Analysis: How deep will the recession be?

In April the economy was around 25% smaller than in February. So, what is the likely effect on British poultry and egg businesses?

“It is now very likely that the UK economy will face a significant recession this year, and we’re already in the middle of that as we speak.” That was the verdict of the Chancellor, Rishi Sunak in May, when it first became apparent a V shaped recovery was unlikely to happen.

Economists expect an even bigger slump in the current quarter than in the first quarter when the UK imposed the lockdown to try and control the spread of COVID-19. The first quarter drop of 2% was driven by a record fall in March output and comes after the economy stagnated in the final quarter of 2019. The Office for National Statistics (ONS) said there had been widespread declines across the services, manufacturing and construction sectors.

Household spending shrank at the fastest pace in more than 11 years as restaurants and high street shops remained shut. Despite growth in sales at the UK’s major supermarkets, agriculture overall has had a reduced output.

Less food produced

While agriculture has been less badly affected than other sectors, it too shrunk in output during April, as the closure of all pubs, restaurants and fast food chains reduced overall demand for food.

Across Europe, twenty million less chicks per week were placed on poultry farms, according to Copa-Cogeca, a farming union. This trend has also been seen in the UK, where numbers have been down from around 21 million per week to 17 million per week.

The ONS has reported monthly gross domestic product (GDP) fell by 20.4% in April 2020, the biggest monthly fall since the series began in 1997.

The monthly growth rate for GDP is volatile. It should therefore be used with caution and alongside other measures, such as the three-month growth rate, when looking for an indicator of the longer-term trend of the economy. However, it is useful in highlighting one-off changes that can be masked by three-month growth rates.

“April’s fall in GDP is the biggest the UK has ever seen, more than three times larger than last month and almost ten times larger than the steepest pre-COVID-19 fall,” says Jonathan Athow, deputy national statistician for Economic Statistics.

This has led to the astonishing position in the UK that in April the economy was around 25% smaller than in February.

“Virtually all areas of the economy were hit,” says Athow. “The UK’s trade with the rest of the world was also badly affected by the pandemic.”

European trade in poultry affected

Data from the EU shows significant disruption to cross border trade in poultry, as well as poultry production.

The closure of foodservice markets has led to oversupply, and cold storages everywhere in Europe being at full capacity with storage costs that keep increasing as the crisis worsens. More than €100 million has already been spent EU-wide.

In parallel to this, a staggering 12% drop in price has occurred over the last 7 weeks putting even greater pressure on European producers. Should this dynamic continue, many farmers will be forced out of business. This will have a knock-on effect that results in the loss of thousands of jobs in rural areas at a moment when all forecasts indicate that we are heading into a long recession.3

However, the picture for poultry is relatively good, in comparison with some other sectors. As PB has previously reported, a report from the European Commission, examining the short-term outlook for agricultural markets, predicts growth in poultry meat should continue in 2020 (+1.2%) as consumers replace more expensive meats with poultry.

In 2019, broiler prices stayed close to the five-year average. Since the beginning of 2020 prices have been above last year’s level due to tight supply and were pushed further up by COVID-19 related stockpiling mid-March. However, they fell quickly after that below the five-year average. Per capita consumption is expected to continue on its rising trend in 2020, up to 23.6 kg (+0.2 kg).

Worse than last time

According to the IMF, the magnitude of the COVID-19 crisis could be far worse than that of 2008-2009: the world economy could contract by 3% year-on-year in 2020, and by 7.5% in the euro area. It could rebound in 2021 to 5.8%, and to 4.7% in the euro area.

Over 2020 and 2021, the IMF estimates that the cumulative loss to global GDP could amount to USD 9 trillion, which is almost half of EU’s GDP. With a possible stagnation of economic growth and a likely recession, unemployment rates across the EU are likely to increase. This would set pressure on overall consumption in value terms, and particularly value chains targeted to export markets, as well as tourism and foodservice. As a result, agricultural income will remain under pressure.

In 2020, poultry exports from the EU should keep growing while demand remains high, but at a moderate pace as bird flu outbreaks in a few of the main EU producers including Poland have resulted into country bans by some trade partners.

Prospects for economic recovery are at the moment uncertain. In June, the World Bank published a report into the effects of the pandemic, which it said would have “staggering economic impacts”.

The report, Global Outlook: Pandemic, Recession: The Global Economy in Crisis, states the COVID-19 pandemic has, “with alarming speed, delivered a global economic shock of enormous magnitude, leading to steep recessions in many countries. The baseline forecast envisions a 5.2 percent contraction in global GDP in 2020—the deepest global recession in eight decades, despite unprecedented policy support.”

David Malpass, president of the World Bank Group, wrote the pandemic would have “severe and long-lasting socio-economic impacts that may well weaken long-term growth prospects—the plunge in investment because of elevated uncertainty, the erosion of human capital from the legions of unemployed, and the potential for ruptures of trade and supply linkages. 

Agriculture sheltered from the worst

Agricultural prices, which weakened over the first half of the year, are expected to decline only marginally in 2020 as a whole, as they are less sensitive to economic activity than industrial commodities, particularly at higher-income levels

Despite production levels and stocks for most staple foods being near alltime highs, there are growing concerns about food security. Food availability is being strained due to supply chain disruptions and restrictions on movement.

Some countries have announced temporary restrictive trade policies such as export bans, similar to those that contributed to spikes in international food prices in 2007-08 and 2010-11. While ample supplies mean that prices are likely to remain stable at the global level, localised price spikes could further erode food security.

 

Unemployment levels expected to reach 10%

  • The UK employment rate in the three months to April 2020 was estimated at 76.4%, 0.3 percentage points higher than a year earlier but 0.1 percentage points down on the previous quarter.
  • The UK unemployment rate for the three months to April 2020 was estimated at 3.9%, 0.1 percentage points higher than a year earlier but largely unchanged on the previous quarter. The jobless figures only cover the first week of lockdown and they are expected to worsen sharply in the coming months.
  • The National Institute of Economic and Social Research (NIESR) said: “We can reasonably expect unemployment to rise very quickly to something over 10% – something we haven’t seen since the early 1990s.”
  • The three months to April 2020 saw total pay fall in real terms for the first time since January 2018. There were an estimated 476,000 vacancies in the UK in March to May 2020; this is 342,000 fewer than the previous quarter and 365,000 fewer than a year earlier; experimental single-month estimates indicate a decrease of approximately 60% of vacancies for May 2020 compared with March 2020.
  • The unemployment benefits claimant count continued to rise during May 2020 reaching 2.8 million; this includes both those employed with low income or hours and those who are unemployed. 

 

 

 

 

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