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Economic impact of snow will largely be made up by summer but an 1000 additional businesses may run out of cash this winter

By CreditMan Monday, December 6, 2010

In January we estimated that the economic impact of the cold weather on GDP was very roughly £1 billion a day. The impact of the latest bout is probably about the same.

But - as we pointed out in January - all the past research shows that the long term impact of extreme weather on GDP is surprisingly small. This is especially true at present when many businesses are still working below full capacity.

Cebr researched various extreme weather episodes both in the UK and elsewhere in Europe in a paper presented to the Weather Risk Management Association in November 2004. This paper pointed out that the real cost of bad weather was almost always exaggerated. Much of the productivity lost is made up fairly soon after. Meanwhile there are offsets - consumers spend more on heating and on warm clothes and any damage from the bad weather from accidents, or structural damage leads to increased spending on repairs. Although the insurance companies will eventually have to raise premiums to pay for their extra spending, in the short run the effect shows up as reduced corporate savings by the insurance sector. There will also be increased overtime worked by various rescue and recovery services which adds to economic activity.

Even the most extreme weather in the UK in the past 200 years - in February 1963 when it was so cold that as a small child I was able to walk across the frozen Thames at Old Windsor - had a non noticeable affect on GDP for the quarter. Our study concluded 'the extremely cold winter in the UK of 1962/63 reduced manufacturing output in February by 7% and in Q1 1963 by 2.5%. Construction work in the quarter was reduced by 16%. But there was no net negative impact on GDP because of higher spending on heating'.

The recession does mean however that there are more businesses than usual close to the verge of bankruptcy. The lost daily productivity is largely a cost to business. If, in addition, it leads to delayed payments, the combined hit on profits and cashflow could send some businesses who might be close to the brink into premature bankruptcy. These are likely to be in the retail, leisure and construction sectors, and in Scotland and the North East of England, which have been most affected by the snow and transport disruption. There is a risk that up to 1,000 additional businesses might fail prematurely in the coming months.

But if we think the impact in the UK is bad, it is worth looking at other Northern European countries. Construction activity in Germany is especially climate sensitive. The temperature during the past 3 days in Germany had been 10-15º C below the usual seasonal level. As a result there is likely to be an economic impact on the German economy about twice as large as a percentage of GDP as for the UK.

Source - Centre for Economics and Business Research Ltd