Major Economic Issues Facing
Food & Drinks Industry
Bord Bia Food and Drinks Industry Day
Jim Power, Chief Economist, Friends First
27th November 2008
To be Discussed
• The International Background & Outlook
• The Irish Economic Background &
Outlook
• Consumer Dynamics
• Trends in the Food & Drinks Industry
• Challenges Ahead for the Industry
International Background
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•
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US economy in recession
UK economy in recession
Euro Zone in recession
Japanese economy in recession
Contagion effect of sub-prime crisis spreading to
emerging world
• Oil prices and strong official response offer hope,
but wealth destruction & credit issues will take
some time to resolve
• Very challenging external environment in 2009
An Economy in Recession
The Irish Economic Outlook
•
•
•
•
•
•
•
•
Economy in recession
Consumer spending slowing sharply
Construction contribution falling sharply
Export sector challenged by exchange rates &
cost competitiveness
Labour market deteriorating sharply
Awful public finances
GDP -2.6% in 2008 & -2.5% in 2009
An economy in transition-housing adjustment
was always going to be painful, but has been
exacerbated by external developments
Economic Recovery Prospects
• 2009 will be extremely challenging
• Recovery prospects in 2010 contingent on
international recovery, bottoming out of
housing market & ending of credit crunch
• Ireland needs to restore competitiveness
on all fronts - wages, public spending, IT
capability, education & taxation
• Strong political leadership now required
Irish Economic Forecast
Average
2008f
2009f
2010f
GDP
-2.6%
-2.5%
2.3%
GNP
-1.5%
-1.5%
2.4%
Consumption
-2.0%
-1.5%
1.0%
Investment
-20.0%
-20.0%
3.0%
Government
3.0%
1.0%
1.0%
Exports
2.0%
2.0%
3.5%
Imports
-2.0%
-2.0%
2.5%
CPI
4.5%
1.0%
2.0%
Unemployment (average)
5.9%
7.8%
8.5%
f=forecast
PSC
MORTGAGE
Aug-08
Feb-08
Aug-07
Feb-07
Aug-06
Feb-06
Aug-05
Feb-05
Aug-04
Feb-04
Aug-03
Feb-03
Aug-02
Feb-02
Aug-01
%
Credit Growth (YoY)
35
30
25
20
15
10
5
0
The Irish Consumer
Confidence & spending have been falling sharply
• Interest Rates (improving)
• Oil Prices (improving)
• Falling House Prices & Housing activity
• Collapse of Irish Equity Market
• Cost of Living increases (improving)
• Rapidly deteriorating Labour Market
• Tighter Fiscal background
• Contraction in consumer spending in 2008 & 2009
-5.0
-10.0
Jan-08
Jan-07
Jan-06
Jan-05
Jan-04
Jan-03
Jan-02
Jan-01
Jan-00
%
Retail Sales (YoY)
20.0
15.0
10.0
5.0
0.0
Mar-08
Mar-07
Mar-06
Mar-05
Mar-04
Mar-03
Mar-02
Mar-01
Mar-00
Mar-99
Mar-98
Mar-97
Irish Consumer Confidence - Falling Sharply
140
120
100
80
60
40
20
0
Interest Rates
•
•
•
•
•
Interest rates on the way down
ECB could go from 3.25% to 2% or lower
Federal Reserve may not stop at 1%
Bank of England to cut further from 3% to 1%
Economic imperatives taking over as inflationary
pressures dissipate
• Liquidity conditions getting gradually better
• Extraordinary times requiring extraordinary
responses
Oil Prices (WTI)
The Housing Market
• Savage correction putting serious pressure on
employment, public finances & growth
• Prices down 10.6% in September, but real
picture more difficult
• -35% to date, another 10% possible
• Excess supply/demand constrained
• Forward indicators very weak
• Registrations -66.1%, Commencements -50.8%
• Completions 50,000 in 2008, 25,000 in 2009 &
30,000 in 2010
New Home Completions
House Prices (YoY)
Collapsing Irish Equity Market
Jan-08
Jan-07
Jan-06
Jan-05
Jan-04
Jan-03
Jan-02
Jan-01
Jan-00
%
Inflationary Pressures Easing
8
7
6
5
4
3
2
1
0
Irish Labour Market Developments
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•
•
•
•
Rapid & massive deterioration
Live register up 94,600 over past year
Employment +6,900 year to Q2
Employment fell 26,600 during second quarter
Difficult to see where job creation will come
from in 2009
• Live register 320,000 end-2009?
• Employment -50,000 in 2009?
The Public Finances
• EBR -€11.0 bln end-Oct (-€3.9 bln end-Oct 2007)
• Revenue under pressure from economic
slowdown
• Spending pressures increasing
• Situation in 2009 will be very difficult again
• Need to prioritise spending without undermining
long-term economic potential & limit tax burden
• Budget 2009 pretty savage, more to come
• Difficult balancing act in more difficult
economic times
The Irish Consumer
•
•
•
•
•
Much more difficult consumer background
Pressure on disposable incomes
Confidence under serious pressure
Serious search for lower prices
Cross border shopping / cheap foreign imports
RECENT TRENDS IN FOOD
& DRINKS INDUSTRY
Recent Output Volume Trends
JUN-AUG ’08 / JUN-AUG ‘07
Manufacturing Output
1.5%
Food Products
-11.0%
Meat & Meat Products
-7.5%
Dairy Products
1.5%
Bread etc
-21.7%
Beverages
8.2%
SOURCE: CSO
Sectoral Labour Market Changes
Sector
Change Q2 07 to Q2 08
Agriculture F&F
+7,500
Other Production
-8,800
Construction
-26,800
Wholesale & Retail Trade
+16,200
Hotels & Restaurants
-3,700
Transport, Storage etc
-3,000
Financial & Business Services
+10,400
Public Admin. & Defence
+1,400
Education
+2,300
Health
+10,700
Other services
+500
Total
+6,900
Source: CSO
Some Recent Price Trends
YEAR TO OCT 2008
JAN 2000 – OCT 2008
CPI
4.0%
41.3%
Food
4.7%
26.2%
Non-Alcoholic
Beverages
Alcoholic Beverages
(off-trade)
Beef
3.5%
20.8%
2.4%
16.8%
9.6%
31.9%
Milk
15.4%
43.3%
Bread
7.9%
40.7%
Vegetables
-1.5%
17.7%
Cheese
3.1%
33.6%
Electricity
11.2%
91.1%
Local Authority Services 0.7%
257.8%
Wheat Prices
Sterling v Euro
Issues for Food & Drinks Industry
• More difficult consumer background
• Exchange rate developments not good - sterling
under serious pressure
• Pressure for consolidation within the industry will
intensify
• Cost containment essential
• Credit management essential
• Innovation & flexibility essential
• Food & Drink Industry to become increasingly
important driver of activity
• Survival of the fittest!
Words of Warning
‘Financial stress that is rooted in the
banking sector typically has more
adverse economic effects than stress
in stock markets or exchange rates’
IMF October 2008
Thank you!