Global economic trends

Today, the status quo of the global economy is largely affected by two countries: China and the US. Together they account for a substantial share of global economic growth, particularly import growth – which affects exports and economic growth in the rest of the world. The commentary below relates specifically to events in 2007.

A turbulent year

In 2007 the global economy was significantly affected by a number of factors including turbulence in financial markets originating in the US, increased focus on food crops as a source of energy and adverse weather conditions in key growing regions across the world, which affected supply. As such, it is predicted that there will be a cautious global economic environment in the short term. However, in the medium term, the outlook is more positive and growth in developing markets remains robust, underpinned by continued strength in East and South Asia.

Gross Domestic Product (GDP)

The world’s wealth is concentrated geographically with just seven out of the 243 national economies accounting for more than half of global GDP. Between them, the US, China, Japan, India, Germany, the UK and France generate almost 60% of world GDP.

However, these top seven countries for GDP account for less than half of the world’s population, with the population heavily concentrated in the Asia Pacific region. (Source: IGD) The pace of growth in world GDP slowed to 3.6% in 2007 and is forecast to fall to 3.3% in 2008 before picking up again in 2009. This slowdown has largely been attributed to the country members of the Organisation for Economic Co-operation and Development (OECD), in particular the US, reflecting the impact of the sub-prime mortgage crisis, with the value of the housing market falling rapidly and credit conditions for businesses and consumers tightening. Although GDP growth has slowed in many of the European markets, the local governments remain reasonably optimistic despite challenging economic conditions in the coming year.

Food inflation

In 2007 food price inflation was a key concern in both developed and developing countries, and in some areas even gave rise to social unrest. In Mexico, for example, ‘tortilla riots’ were triggered by large price increases in maize flour. In Mexico and in India, wheat exports were banned to protect domestic food supplies. Food inflation has been affected in particular by the following three developments:

Biofuels

The squeeze on supply stemmed from the increased use of food crops for production of biofuels which, in turn, led to large increases in the prices of vegetable oils and grains, contributing to an overall 15% increase in the index of agricultural prices and a 20% rise in food prices (Source: Worldbank).

Demand from developing countries

Demand from emerging economies such as India and China is increasing. Strong economic growth in Asia is resulting in a rising demand for foods such as meat, cereals and dairy products, as tastes change in line with rising incomes and Western influences.

Rising energy costs

Global demand for oil, gas and electricity is pushing up energy costs worldwide and causing an increase in operational costs for businesses as well as the general public. At the beginning of 2008, the price of crude oil hit $100 per barrel, and major oil companies in the UK and France announced plans to raise prices by as much as 27%.

The wholesale prices for gas and electricity have also risen by 60% and 66% respectively since the beginning of 2007 and energy companies are highly likely to pass on some of the costs to the end consumer.

Interest rates

Consumer spending is heavily influenced by local interest rates which determine the costs of regular mortgage and credit repayments with a rising interest rate often triggering a cutback in spending. At a global level interest rates have mostly risen in 2007. Coupled with rising food and energy prices, there is some evidence that consumer confidence has started to weaken, particularly in the UK.

Disposable income

Growth in disposable income provides consumers with the ability to purchase an increased amount of discretionary and luxury items. Although trends indicate that there is a growing divide between the wealthiest and poorest income groups, people’s disposable income has gradually increased across the world.

Unemployment rates

According to the UN, the rate of global unemployment in 2006 was 6.3%, remaining almost unchanged from the previous year. The largest decrease in unemployment occurred in the developed countries and the European Union, with a decline of 0.6%. East Asia’s unemployment rate was 3.6%, remaining the lowest in the world, while the unemployment rate in the Middle East and North Africa remained the highest at 12.2%.

What does this mean for Bakkavör?

The immediate outlook for the global economy remains cautious, following the turbulence in 2007. However in the medium term the outlook is more positive and growth in developing markets remains robust, underpinned by continued strength in East and South Asia. Long-term trends for GDP growth in developed countries remain positive. Nonetheless the impact of rising energy costs on the food and grocery supply chain is significant and, as such, manufacturers must continue to look for ways to improve energy, fuel and transport efficiencies and review operational working practices. Whatever the economic situation, people always need to eat and the established and strong mega-trends underpin the demand for our products. Although fresh prepared foods may be perceived as a luxury by some, for most people they are a lifestyle choice and there are other discretionary items which are likely to be forsaken in the event of a long-lasting economic downturn.

We believe that with our extensive product portfolio and balanced exposure to various international markets we are well placed to manage any short-term and local turbulence and enjoy the long-ter­m benefits of strong global demand for our products