Jim Power: Energy costs are a problem but food prices risk becoming a real hot potato

The OECD has warned that so-called high-frequency indicators are pointing to a slowdown in European economic growth 
Jim Power: Energy costs are a problem but food prices risk becoming a real hot potato

In the food-supply chain, if the primary producer is to make a living and processors are to make acceptable returns, food prices are likely to rise further over the coming months.

Ireland is a small, open economy that is heavily exposed to global economic developments, with a strong presence of multinationals and substantial exports.

This raises the very pertinent question as to how long the Irish economy can continue to defy recent worrying international trends.

The global environment is becoming an issue of increasing concern. The situation was fragile back in January as the legacy of Covid was creating very real difficulties, but the Russian invasion of Ukraine has exacerbated the problems in a dramatic manner. 

In a sense, the global economy is in the midst of a crisis on top of another crisis. The consequences are not looking particularly pretty at the moment and there could be worse to come.

Significant problems

Most financial market indicators are clearly suggesting potentially significant problems for the global economy.

Government bond yields are increasing at a significant pace; many central banks are increasing short-term interest rates; stock markets are very volatile, very weak, and very nervous; the dollar is very strong; and emerging market debt markets are looking very vulnerable. 

All of these financial market developments are typically indicative of more difficult times ahead. It is not inevitable, but the risks are very clear and very real.

The Organisation for Economic Cooperation and Development has issued stark messages about the European economy, warning that so-called high-frequency indicators are pointing to a slowdown in European economic growth. 

High-frequency indicators including new car sales are pointing to a slowdown in economic growth, the OECD has warned. Picture: Larry Cummins
High-frequency indicators including new car sales are pointing to a slowdown in economic growth, the OECD has warned. Picture: Larry Cummins

These indicators include business order books; business and consumer confidence surveys; building permits, and new car sales. 

At the same time, inflationary pressures are building. The ECB will have to act sooner rather than later to try and kill off inflation before it becomes too embedded in the system. 

US growth momentum is still strong, and particularly the labour market. The US Federal Reserve is already on an aggressive rate-tightening cycle. 

The US central bank will have to force the economy to slow significantly in an attempt to bring inflation back under control. Likewise for the Bank of England. Indeed, there are now considerable fears after recent weak data that the UK economy could be on the brink of recession. 

The ECB is now under increasing pressure to do the same. 

It is clear that international developments should be giving us deep cause for concern. It would be one thing if there was any reason to believe that the Russian assault on Ukraine might end anytime soon, but this appears unlikely. 

Meanwhile, the Irish economy is continuing to show strong momentum, but particularly the labour market and broad-based tax revenues, which are continuing to grow strongly. 

Not surprisingly, business and consumer confidence surveys are starting to weaken quite significantly, however.

Moreover, the inflation story continues to deteriorate. Irish inflation hit 7% in April, which is the highest annual rate since November 2000. 

The old reliables such as motor fuel, electricity, natural gas, home heating oil, alcohol (due to the unfortunate timing of minimum unit pricing), and private rents are pushing inflation up in a significant way. 

However, the inflationary impulses are becoming more widespread.

The cost of hotel accommodation increased by almost 20% in the year. This does not bode well for stay-at-home holidays this summer.

Most worryingly for the Government, food price inflation is also gathering momentum, with an annual increase of 3.5%. For people who enjoy bread or pasta, the price increases are particularly steep. 

The war in Ukraine and its impact on wheat prices and supply is obviously a key driver of food inflation, but all of the costs of producing food are rising strongly, particularly fertilisers. 

In the food-supply chain, if the primary producer is to have any chance of making a living and if the processors in the middle of the supply chain are to make acceptable returns in the current environment, it seems inevitable that food prices should rise a lot more over the coming months. 

While energy costs are a problem, food prices risk becoming a real hot potato.

We live in incredibly uncertain times and Ireland needs to hold on tight to avoid falling off the rollercoaster.

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