Blog: Dean BestThe US readies itself for the R word

Dean Best | 27 October 2008

In the UK, the R word is finally out in the open. On Friday (24 October), it emerged that the UK economy had shrunk for the first time since 1992 - confirming Bank of England chief Mervyn King's comments earlier in the week that it was likely the country was entering a recession.

UK output fell 0.5% during the three months from July to September and it is widely accepted that the country will see two consecutive quarters of falling GDP by the end of the year - meeting the technical definition of a recession.

Of course, such a prospect does not come as any great shock. Faced with a frozen credit market and soaring household bills, consumers have been tightening their belts, hitting spending on the High Street. UK food manufacturers and retailers have not been immune from the downturn and there is the fear that their problems will worsen as the economy moves into recession.

And, as UK Prime Minister Gordon Brown is fond of telling us, no country is immune from the economic turbulence. Nerves among the business community on both sides of the Atlantic, throughout Europe and in many global markets are likely to be running high.

Nevertheless, some are determined to remain optimistic. At the SIAL food industry exhibition in Paris last week, just-food heard a bullish tone from food makers of all colours. The likes of dairy giant Lactalis insisted continued investment behind its brands was key to growth, while frozen foods specialist Pinguin argued its business was well positioned to ride the economic stormy waters as consumers trade down.

One food group seen as ideally placed to withstand the downturn is Nestle. Last week, the Swiss food giant upped its forecast for annual sales and profits and, strikingly, signalled its confidence with some guidance on the revenue and margin growth it expects to see next year.

Elsewhere, however, the outlook is less rosy. Premier Foods, the UK's largest food group, was forced to deny reports that it was looking to sell off household names like Mr Kipling to reduce its debts. Premier has sought to reassure investors about the strength of the business but questions have grown over the company's ability to meet its banking covenants.

Firms in the US have already been at the centre of such speculation with fears over the future of poultry giant Pilgrim's Pride a prime example. Less critical but just as telling was the news last week from US food group Hormel Foods that it expects profits to be lower during its current fiscal year. It was Hormel's second profit warning in two months and the company said earnings would be hit by the twin problems of the financial crisis and continuing pressure on costs.

And all eyes will be firmly on the US this week when the country announces its GDP figures for the third quarter of 2008. It's looking likely that the R word will be rearing its head Stateside, too.


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