Outlook 2025: Lower inflation offers hope for UK economy
© Adobe Stock The world is changing. It is not as safe a place to be as last year or over the past decade. International markets are nervous. Protectionism is on the rise.
On the surface, that all sounds good for British farming.
While the UK has not directly adopted protectionist policies, it will be affected by the decisions of other countries, says Andersons partner Graham Redman.
See also: Farm cash flow advice as pressure mounts
In summary
- Global trade flows may change – this could be a concern for farm input supply and price
- Falling base rates will encourage productive investment, but higher tax burdens on UK workforce could slow economic growthÂ
- Focus on what the business can control – skilled labour is one of farming’s most valuable resources
Trade flows may change in the coming months and years, and businesses will need to embrace that as best they can.
Farming inputs could cause the most trade concern, however, as some come from mines in only a few areas of the world.
Following the financial crisis in 2008-09, the UK had a long period of record-low interest rates.
The Bank of England raised them again from 2021 to deal with inflation triggered by the price surge after lockdown and the start of the Ukraine war.
We have since seen a period of falling and potentially low inflation, currently back near the target level of 2%.
Base rates
Lower inflation bodes well for further base rate reductions.
Andersons expects a series of cuts over the next three years, with the level settling around 3.5% in the medium term, barring further economic shocks.
This reduction will, in turn, boost growth prospects.
The economy is experiencing stagnating output; since the financial crisis, the average level of UK growth has been below 2% and is now at an insipid 1% or thereabouts.
As base rates fall, companies and private individuals pay less to borrow, so become more receptive to productive investments. This might help rebuild living standards.
Yet the population is growing while the workforce is not, meaning the tax burden per worker is rising. This is likely to drag on economic growth.
Wage costs look as if they will continue rising above inflation in the coming year for availability reasons. Unemployment hovers above 4% (about 1.44 million people) in the UK, which is not historically high.
However, the Office for National Statistics reveals that a record 2.83m people are off work on long-term sick leave, up by 50% in four years.
Welfare payments for sick workers are now higher than unemployment benefits. Agricultural sick leave rose 11% in 2023, and 44% since lockdown.
Value employees
However, for the employer, skills shortages matter more than finding a (willing) worker. Employers pay for value generated and jobs done, rather than simply people’s time.
The right person with proper training and a clear focus is worth more than most other resources, especially as farm sizes increase.
Talented business leaders can generate more loyalty, commitment, and therefore value from their workers than the average. Poor managers do not see their staff as a resource at all.
This is a section of farm management that parts of the industry should spend more time and resource developing.
Farm profitability prospects
Following Defra’s surprisingly high provisional figures for 2023, UK farm profits in 2024 are expected to fall.
Although in line with some of the better recent years, they may not be perceived as such after the exceptional 2021-23 period and against the backdrop of historically high costs, says senior agribusiness analyst James Webster-Rusk.
Some variable costs have fallen during 2024, most notably for fertiliser and animal feed.
The latter will improve prospects for livestock farming, but will prove especially demanding for cereal growers.
For many businesses, fixed costs are the most challenging. Key ones such as labour and machinery continue to rise.
Defra’s provisional Total Income From Farming for 2023 shows the third-highest level on record, at £7.2bn.
A much larger decline had been expected following the exceptional years of 2021 and 2022, and the figure may well be revised.
For now, Andersons estimates a further drop in profits of 9% for 2024, to £6.55bn, the top end of the range between 2008 (the financial crisis) and 2020, when the UK left the EU.
However, the long-term decline of direct support for farmers in the UK in real terms is very noticeable, mainly due to inflation as well as changes in the farm support structure and Defra underspends.
Looking to 2025, Andersons forecasts little change. Output is expected to rise, while key inputs such as fertiliser and feed look relatively stable.
Other costs, such as finance, wages and wider services, are forecast to increase at or above inflation.