Cold snap not seen freezing economic recovery

LONDON Mon Jan 11, 2010 12:58pm GMT

Fields are seen covered in snow through an aircraft window above Gatwick Airport near London January 10, 2010. REUTERS/Stefan Wermuth

Fields are seen covered in snow through an aircraft window above Gatwick Airport near London January 10, 2010.

Credit: Reuters/Stefan Wermuth

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LONDON (Reuters) - Weeks of arctic weather are not expected to endanger the British economy's anaemic recovery but the impact they have had on productivity could push thousands of already recession-hit businesses over the edge.

The most severe cold snap in 30 years -- with temperatures plummeting to below minus 21 C and much of the country blanketed in several inches of snow -- has caused widespread disruption to transport across Britain, with many people unable to get to work and thousands of schools closed.

Estimates from industry group the Forum of Private Business suggest the cost of employee absenteeism could reach as much as 450 million pounds a day if the cold snap continues until mid-January, as predicted by the Met Office.

While the resulting loss of productivity is likely to have a short-term effect, with areas such as manufacturing and construction particularly hard hit, this output can be recovered and any impact should also be mitigated by the boost to the energy sector, economists say.

"What is not likely at all is that the current weather conditions will jeopardise the recovery," said Philip Shaw, chief economist at Investec.

"Industry can recover lost output," he said. "If demand has fallen back as a result (of the weather) then there will be some sort of impact on output over the first quarter as a whole ... but not particularly significant."

Increased demand for utilities, a component of industrial production alongside manufacturing, would help offset any negative impact, said Alan Clarke, economist at BNP Paribas.

"People are cranking up their heating and use of electricity so that could probably go quite high," he said. "So the overall industrial production (data) won't be as bad as manufacturing."

Gas demand hit a series of all-time highs last week, with National Grid issuing two alerts to warn of a potential shortfall in supply, and almost 100 firms being forced to stop using gas to ensure supplies to households were maintained.

EXTREME WEATHER

Research of various extreme weather episodes both in the UK and elsewhere in Europe carried out by independent think tank the Centre for Economics and Business Research (CEBR) show the impact of severe weather on gross domestic product is small.

"Even the most extreme weather in the UK in the past 200 years, in February 1963 ... had a non-noticeable affect on GDP for the quarter," said CEBR chief executive Douglas McWilliams.

While manufacturing output fell by 2.5 percent in the first quarter of that year and construction work was reduced by 16 percent over the same period, he said, higher spending on heating meant the overall impact on GDP was not negative.

The fact the current cold snap has coincided with a recession may even help mitigate any effect on output, he added, as very few businesses are working at full capacity so it should be easier to make up lost productivity.

But with many smaller companies still struggling to get hold of credit, the impact of the extreme weather on businesses is likely to be much more significant than on the wider economy.

"The combined hit on profits and cash flow could send many businesses who might be close to the brink into premature bankruptcy," said the CEBR's McWilliams, predicting up to 2,000 additional businesses might fail in the first quarter of 2010.

Many businesses that are close to failing are in the retail sector, which has been particularly affected by the snow and transport disruption, he added.

Although some retailers have seen a boost from strong demand for warm clothes and panic buying of food, the sector as a whole will have been hit by the lack of footfall on the high street, analysts said.

"People are going to avoid visiting the high street in weather like this," said Sarah Peters, senior retail analyst at Verdict research. "That is going to have quite a big impact."

"There would be some upside in online but I don't think that would be enough to counteract the fact that people aren't going out and spending."

While this will hit individual businesses, the overall effect on the economy will be minimal, she added, with expected cuts to government expenditure needed to tackle Britain's record public deficit more likely to impact consumer spending.

"January is a weaker month for retailers anyway so they won't have expected big sales," she said. "There are bigger things going on later in the year that may well have more of an impact on any kind of recovery we are seeing now as apposed to just a few weeks of bad weather."

(Editing by Toby Chopra)

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