The global economic slowdown that began with America’s sub-prime mortgage meltdown is set to creep into the Kenyan economy in the next few months but from unexpected quarters.
Over the past seven months that US has been struggling to find a way out of the home loans debt crisis, it has been unable to effectively absorb much of the goods and services that it consumes from all corners of the globe leading to a slowdown in exports.
This slowdown in exports coupled with the fact that some economies were directly hit by the sub-prime crisis, is beginning to cause an economic meltdown in Europe.
Figures released on August 14 show that the euro-area economy shrank at an annualised rate of 0.8 per cent in the second quarter, the first such reversal since 2001. And things are unlikely to improve soon.
Flower industry experts now say this slow down means Europe will be unable to absorb more Kenyan flowers this year — ruling out any hope of market growth. Peter van Ostaijen, the director of Dutch flower information service HBAG and vice secretary general of the international trade association, Union Fleurs, says demand for flowers in Europe is stagnating.
"Exports are clearly in a phase of going down," he told Business Daily, referring to sales from Holland to large European markets like Germany and UK. "We expect to sustain the current level of exports but growth will be at zero, not the two to three per cent we realised in the previous years."
During times of recession, consumers tend to economise on luxury items and for most people, cut flowers fall into this category.
"The sales figures are going down. Last year the Dutch industry grew by four per cent over 2007. In the first half of this year, growth has been flat," said Mr van Ostaijen.
Cut flowers are Kenya’s most valuable export and more than 90 per cent of total exports is sold in the European market. Many growers sell to the Dutch auction house Floraholland, where Kenya is the single largest foreign supplier.
Last year, sales of Kenyan flowers through the auction grew by 8.5 per cent. But Mr Van Ostaijen believes the European market will not absorb any more flowers this year. "I don’t expect there will be room for expansion of Kenyan exports."
This gloomy outlook is coming at a time when Kenyan farmers attracted by high and prompt payments and comparatively low labour needs, are ditching traditional cash crops like coffee and tea in favour of cut flowers.
But with the prospects of a recession appearing increasingly high, the flower industry may not be such an appealing market. New figures out last week showed that Europe’s economy contracted last quarter for the first time since the introduction of the euro.
Soaring costs have eroded consumer spending power and companies facing slowing sales and weaker demand for exports as the downturn hits globally are cutting investment.
Economists warned that the risk of a recession, defined as two consecutive quarters of contraction, has increased.
Tom Willings, the supply chain director at World Flowers, a supplier to UK supermarkets and substantial buyer of Kenyan flowers, said it was not feeling the slowdown yet but that "with widespread talk of a recession in the UK, it is reasonable to expect a degree of negative growth in our own sales".
Demand for other high value horticultural products could also be hit by reduced spending in Europe. Organic and Fairtrade vegetables, tea and coffee are typically priced significantly higher than conventional products.
Flowers are prepared for export. Though these categories, also known as ‘ethical’ products, have grown rapidly in the last two years, many analysts say they are being driven by consumers looking for a feel good factor, rather than real commitment to their methods of production.
"We’ve definitely seen consumers changing their shopping habits," said Natalie Berg, grocery research manager at PlanetRetail, a UK research firm. "And retailers are, in a way, deterring sales of Fairtrade and organic products by pushing low pricing. It’s crucial for them to retain their customers."
Major supermarkets like Tesco are placing their private label, economy ranges at the front of their stores, says Berg. "Six months ago it was all about sustainability and Fairtrade products. Now there’s a real shift to price and value."
The Soil Association, which certifies around three quarters of organic products in the UK, said that though growth is expected to slow, it still expects a healthy 10 per cent rise in organic sales this year, outstripping the general food market by four or five times.
"Perhaps it is inevitable that we might see some decline in demand among less deeply committed organic consumers, but this is more likely to be a plateau than a reverse," said director Patrick Holden.
Others are more pessimistic.
"The downturn has only just started in the UK. It’s certainly going to get worse over the next half," said Richard Perks, director of retail research at Mintel.
"We’ve had a consumer boom in the UK for the last 15 years, with people constantly looking to trade up. But their confidence was being boosted by the rising housing market. That’s not there now and I think we’ll see a lot more trading down. All high end products will come under pressure."
Some analysts say however that more expensive items, such as the large-head roses grown in Kenya, are less susceptible to hard economic times than cheaper products destined for lower income consumers.
Mr Willings said that World Flowers was "well placed" to ride out the downturn. "We are committed to generating year-on-year growth for both our Kenyan partners and our customer base, and feel we offer a product which will remain attractive to the UK public during the anticipated economic slowdown."
Kenyan growers availing of natural heat and sunlight could be at an advantage over others using greenhouses, said Mr van Ostaijen.
"The production of flowers is relatively cheap in Kenya in terms of energy so this might make them more attractive price-wise."
Material needed for four in a row
Cubes, Skelleton leaves and Bullion wire
Adding the gerberas