Economy feels the strain

The BSE risk: City economists warn of huge job losses and inflation pressure

The beef crisis could be bad for our wallets as well as our health if the worst fears about the need to slaughter cattle are borne out. It has already hit the pound, which fell by half a pfennig against the German mark yesterday.

City of London experts warned yesterday that in the most extreme scenario, government borrowing would be billions of pounds higher, tens of thousand of meat industry workers could be unemployed, inflation would rise and growth would decline.

The damage to public sector finances could easily dash hopes of tax cuts in the next Budget and beyond.

Ian Shepherdson at City firm HSBC Markets said the sharp fall in beef prices would initially reduce retail prices, but in the longer run a reduced UK supply of beef and dairy products would raise imports and increase inflation. At the outside, if the entire herd were slaughtered, inflation could be 1.5 per cent higher than its current 2.9 per cent.

The loss of British supplies would also damage the balance of trade. Beef exports amount to just over pounds 500m a year, but Britons spend pounds 3.5bn on home produced beef, some of which will switch to imported meat. If dairy exports were also affected, the trade deficit might be as much as pounds 7bn a year worse.

Although consumers will switch to alternatives such as pork and poultry, Mr Shepherdson argued that the crisis could reduce GDP by more than 1 per cent in a full year.

Other economists thought the effects on the economy would not be this big, as the loss of the entire herd seems unlikely. However, there could be a severe impact in meat-producing regions such as East Anglia and Scotland.

Many predicted the crisis would have dire consequences for the Government's finances. The immediate cost would be compensation for farmers, with preliminary estimates of the total cost of slaughtering all 11m cattle put at pounds 7bn to pounds 20bn. The EU will pick up some of the eventual bill for farm compensation, but the amount would have to be negotiated by the Government.

Additional compensation claims from the rest of the meat and meat processing industry could also be expected. A Treasury spokesman said any estimates of the cost would be hypothetical, as the extent of compensation if meat products had to be withdrawn from the shelves would be a matter for debate.

The costs of additional healthcare for the unknown future number of victims of CJD enter the equation too, although insurers said yesterday that private medical insurance policies covered the disease.

A further burden on the public purse will be unemployment benefit for those who lose their jobs in the beef industry. It currently employs about 40,000 people, including 5,500 in slaughterhouses.

Simon Briscoe, an expert on government finances at City bank Nikko Europe said: ``There is a small risk the Government will face an enormous cost of billions of pounds and a very good chance that the cost will run into hundreds of millions.''

Cost of slaughtering Britain's 11.8m cattle

Compensation package to farmers including slaughter bill and loss

of earnings pounds 14bn

Potential compensation to others dependent on the beef industry,

such as processors, abattoirs, export firms, hauliers pounds 3bn

Restocking herds from abroad over three-year period pounds 5bn

All beef products worth pounds 4bn

Beef exports worth pounds 520m

Total value of live exported cattle pounds 637m

Total value of Britain's dairy industry pounds 3.5bn

Unemployment costs if the beef industry collapsed, using Gillian

Shephard's 1992 cost of pounds 9,000 a year per person (NFU estimate

is 500,000 people directly or indirectly involved in beef industry) pounds 4.5bn

TOTAL pounds 35.2bn