What does a recession mean for UK food and drink sector

A recession means that the UK economy contracted in two consecutive quarters, with the news coming after a difficult period for manufacturers and consumers as they continue to manage high levels of food and drink inflation, the cost of living crisis and expensive energy bills.

And while it was also revealed by the ONS that food prices fell during January 2024 for the first time in more than two years, they remain high, with the food and non-alcoholic beverage inflation rate now at 7%​​. The economy-wide inflation rate meanwhile sits at 4%.

How the Government will respond to the news of a recession remains to be seen, but with a general election on the horizon, changes could be afoot.

Asked for his perspective on the current state of the UK economy and the food and drink sector, non-executive director at Rollits Julian Wild told Food Manufacture that current circumstances made for a “toxic mix​”.

“Contrary to the government’s pledges, inflation is not falling as fast as predicted and is still at least double the Bank of England’s 2% target​,” he said.

“Add to this that the economy is not growing, interest rates are being held at current levels for the time-being, the UK is burdened by high levels of national debt and there is no scope for tax cuts without reducing cash-strapped public services even further, the net result is that big swathes of the population are feeling the cost-of-living crisis and are mightily fed up​.”

How this all relates to food and drink manufacturers, Wild added: “The food industry seems to have settled down after the huge hike in energy costs but is still seeing wage inflation around 6% and increases in the national living wage. As always, getting price increases from customers is difficult and manufacturers are always squeezed​.”

Head of consumer research at Shore Capital Dr Clive Black described a similarly challenging picture, explaining that the current environment was putting “lots of pressure​” on the food and drink sector.

“Straitened consumers cut back on volumes and traded down whilst energy and labour costs went up​,” he told Food Manufacture.

“Businesses had to navigate how much to recover from the market with the volume and mix consequences of price rises.”​

Black believes that the pressures applied to consumers have benefitted some areas of the F&B sector and penalised others.

“The outcome a big switch in share from proprietary brands to private label, with the German discount chains and retailers with strong loyalty programmes coming through​,” he continued.

“There was also a switch from the hospitality channel to retail. Private label manufacturers gained share but cost recovery was tough branded players are now trying to recoup some of the lost share with promotions​.”

Projecting forward, Black feels that 2024 will prove more stable with inflation normalising and living standards on the rise.

“Recovering volumes, improved mix and more settled trading – what could possibly go wrong​,” he added.

Meanwhile, Nick Ryan, co-founder and CCO at Acumen Commercial Insights, said that the news of recession puts the cost of living crisis into “further perspective​”.

"This reinforces in consumers’ minds that they need to be prudent in terms of expenditure​,” he told Food Manufacture.

“In food retailing, this plays into the hands of the discounters who will continue to attract shoppers with their value messaging, while the mainstream retailers will continue to try and emulate this through their Aldi and Lidl price match schemes.”​

Striking a more positive tone, Ryan believes that with food and drink inflation falling and interest rates expected to be cut halfway through the year, consumer optimism could be on the rise soon.

He added: “We can expect some upturn in household expenditure as we head into Q2/2024. However geo-political instability in the Middle East, compounded by the Red Sea issue will continue to fan the inflationary winds and might cause inflation to be stickier than one would like."​

In other news, read more about why plant-based meat alternative prices remain so high.​​