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Tuesday, 20 March, 2001, 11:52 GMT
UK economy to ride out farm crisis
Headline from Racing Post
The crisis is hurting a host of non-farm industries

By BBC News Online's Mike Verdin

First it was the economy's newest sector which was sent into turmoil.

Now it is one of the oldest areas of business.

No sooner had the collapse of dot.com stocks reminded us of the dangers of investment bubbles than the foot-and-mouth crisis warned that age-old industries such as farming also carry risks.

The cost of foot-and-mouth
Cost to farmers and suppliers 2001: 3.6bn
Net cost to rest of economy: 5.4bn
Cost to GDP in 2002: 2.1bn
Loss to Treasury in tax receipts: 2.7bn
Compensation costs: at least 150m

Source: CEBR

But, just as the collapse in shares in technology firms has affected stock prices in all manner of companies, what are the implications of the foot-and-mouth epidemic for the wider economy?

According to the Centre for Economic and Business Research, a think tank, the outbreak will cost the country 9.0bn.

Or put it another way, the implications of the outbreak will knock one point off the growth in UK economic output (GDP) in 2001.

Output cut

"Now we see 2%, rather than 3%, as a reasonable growth figure for this year," said CEBR chief executive Douglas McWilliams.

European Central Bank headquarters in Frankfurt
European Central Bank: interest rate dilemma
"We had been about to revise up our GDP forecast - consumer spending is holding up well," he told BBC News Online.

"But the knock-on effects of foot-and-mouth are much more serious than we had earlier estimated."

Sporting events such as the Cheltenham horseracing festival have been cancelled and consumers have suffered to some extent with rising meat prices.

Limited impact

Nonetheless, unlike the collapse in dot.com shares, which has affected many of us even if only through the value of pension funds, the impact of foot-and-mouth is characterised by its narrow focus, the CEBR believes.

"The disease is having a relatively small impact on a large number of people, and a large impact on a narrow band," Mr McWilliams said.


The chancellor has saved up a lot of money for a rainy day. That rainy day has come

Douglas McWIlliams, CEBR

As others have suggested, tourism will bear the brunt of the fallout, with the CEBR putting the cost of the epidemic to farming at 3.6bn.

For many city dwellers, the first time they will be significantly inconvenienced by foot-and-mouth will be at Easter.

"People who usually choose to go the countryside then will have to find alternatives," Mr McWilliams said.

Prices to fall

Looking further ahead, meat-eating townies can even be expected to see benefits from an outbreak causing such misery to rural communities.

"At the end of the year we would expect meat prices to come down as meat which would in a normal year have been exported floods on to the UK market," Mr McWilliams said.

While the UK livestock farmers normally export one third of pig meat production, and one quarter of sheep meat output, the search for foreign buyers is likely to remain difficult long after the country is cleared of foot-and-mouth.

Indeed, the CEBR believes that even if the disease were eradicated forthwith, UK GDP would still be hit to the tune of 2.1bn next year as the impact of lost exports, and tourism, continued to be felt.

Tax losses

And such losses will only add to the impact of the disease on tax receipts, which fall in line with a drop in economic activity.

The CEBR sees the Treasury receiving 2.7bn less in tax income this year than had been forecast, a shortfall which might be expected to feed through into higher levies elsewhere.

But with public finances hitting a surplus of 16.7bn in January, Mr McWilliams believes the Treasury will be able to absorb the tax loss.

"The chancellor has saved up a lot of money for a rainy day," he said. "That rainy day has come."

Again it seems the burden of the outbreak will be shouldered by a narrow range of victims.

Overestimate

Not that all analysts concur that the economic burden of foot-and-mouth will prove as heavy as the CEBR believes.

"If you are talking about 1.1% of GDP, that is a large figure," said John Butler, UK economist at investment bank HSBC.

"A figure of that size is going to have implications for interest rates. The [CEBR's] estimate is high - although it might be good for getting publicity,"

HSBC, which is using the impact of the BSE crisis on which to base its forecasts, sees the foot-and-mouth outbreak trimming 0.6% off UK exports this year, and 0.2% off GDP.

"The 1.1% GDP figure - that's bigger than the effect we believe the US going into recession is going to have on the UK," Mr Butler said.

" We have got to attach a bigger value to the idea of US recession."

Continental impact

For Bank of America's Jeremy Hawkins, however, it is not the size of foot-and-mouth's impact on GDP which is of such importance, but where it will hit.

The CEBR's estimate is "as good as any", said Mr Hawkins, the bank's chief economist Europe.

"The question is how the affect on a part of the economy feeds through into the rest of it, and the potentially damaging effect the outbreak can have in general."

And while the foot-and-mouth virus has been found on more than 320 UK farms, compared with one elsewhere in Europe, it is on the Continent that the impact will be more keenly felt.

Meat prices on the Continent have risen 10-20% as the effect of bans on moving livestock have taken hold.

Rate dilemma

This will only add to inflationary pressures which are stronger on the Continent than in the UK.

Agriculture Minister Nick Brown
Mr Brown: Meeting with EU ministers
"Eurozone inflation is at 2.6% compared to a target ceiling of 2.0%," Mr Hawkins said.

So the European Central Bank, which sets eurozone interest rates, is left with "something of a dilemma".

"Does it raise interest rates to tackle the inflationary pressure, and risk heavy criticism from producers and other industries facing economic slowdown?

"Or does it lower interest rates, and risk making the inflation problem worse?"

Better shape

The UK, where inflation is below target, is in better shape to fight the economic side effects of foot-and-mouth.

"The Bank of England has the luxury of low inflation, and so can afford to reduce interest rates if it wants.

"And as for the rest of the economy being affected by foot-and-mouth - manufacturers probably won't be affected. Nor will, say, the financial services industry."

So the UK economy as a whole would seem to be in a position where it can absorb the costs of the foot-and-mouth crisis, even if for individual farmers, tourism operators and rural businesses the outbreak spells financial disaster.

Updates

Douglas McWilliams, however, is careful to add that the CEBR's estimate will be frequently revised as new information appears.

As well he might. A glance through company announcements reveals that it is not just tourism and agricultural businesses which are warning that trade is being affected by the outbreak, but the likes of packaging firm Devro.

Publishing giant Trinity Mirror said that the postponement of the Cheltenham horseracing festival would "inevitably have a negative effect" on the performance of its Racing Post title.

And on Tuesday construction services firm Peterhouse Group warned that work on pylons and aerials was being delayed by the ban on public access to farming land.

"We are liasing with all our clients in the full knowledge that the planned work programme will need to rapidly accelerate once access to agricultural land is permitted," the firm said.

It is not, indeed, only farmers, hotel managers and racegoers who are hoping for a rapid end to the foot-and-mouth crisis.

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See also:

18 Mar 01 | Scotland
Farms complete first cull
18 Mar 01 | UK
Farm disease cases top 300
18 Mar 01 | Scotland
Farms complete first cull
18 Mar 01 | UK Politics
Elections still planned for May
17 Mar 01 | UK
Tourism aid 'must wait'
17 Mar 01 | Europe
On the brink of ruin?
19 Mar 01 | Scotland
Unrest over foot-and-mouth cull
19 Mar 01 | UK
Supporting stressed farmers
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