Why the freeze in Europe could be good news for the economy

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The Independent Online
Cold enough for you? The cold weather clouds do have a silver lining as far as the economy is concerned: cold weather such as Europe has been experiencing, is in the longer term (though not in the short) good for economic activity. Result? While Europe will experience a shortfall in growth over the winter, there should be a sharp bounce back in the spring and summer. That bounce will mean that overall activity through the year will turn out to be pretty much the same as it otherwise would have been. If we get a cold summer too, then growth will be higher.

The fact that it was cold enough for the Dutch to run their 125-mile canal skating race for the first time since 1986 suggests that this winter will turn out to be very unusual. Further south, Spain is having its worst winter for 20 years, while later this week expect a further rise in German unemployment in December to be attributed at least in part to the impact bad weather has been having on the construction industry there.

We tend to think that in our centrally-heated world a patch of cold weather is easily accommodated by our economies, but actually for some industries (like construction) unseasonable weather can still have a dramatic effect.

It is far too early to try to assess the full impact of the weather, if only because we have no idea how long the cold snap will persist. Some effects have already been seen. Aside from the construction effect, there has been a rise in seasonable vegetable prices, particularly in the Netherlands and in Italy and Spain.

Energy output naturally rises, though so far there has been no noticeable rise in the oil price which has been quite strong - but it was firm before anyone knew what the winter would be like. But while it is early for this winter, we do know from past experience a bit about the general impact of bad weather. Last winter was pretty chilly too and so in the spring Kleinwort Benson Securities carried out an assessment of cold weather in general on economic activity in the UK.

The results are set out in the chart. Leo Doyle, the economist there, looked back at temperature statistics since 1980 and then checked that against fluctuations in GDP. As you can see, in winter a typical cold winter knocks 0.2 per cent off GDP during that actual winter.

The rise in energy output is more than offset by the fall in construction. But then about half the decline in construction is recovered in the spring, and we tend to boost spending on things like holidays in hot climates, so that overall there is little net change.

In fact if you look at growth rates rather than absolute levels of GDP the addition to growth following a cold winter is greater than the subtraction during the winter itself.

In terms of personal spending (which excludes construction) the biggest "losers" from a cold winter are betting and gaming, private car sales, textiles and furnishings, tourist spending in the UK and, a trifle surprisingly, spending on books. For every one degree below the norm during winter there is, apparently, nearly a 2 per cent fall in book purchase.

You might imagine that on cold winter evenings the thing to do is read a good book in front of the fire. Maybe - but evidently we don't like going out and buying the book in the first place.

At other times in the year the benefits of colder weather are even more clearly positive, for they are positive both in the short and the longer- terms. Obviously sales of some items rise in very hot weather: we drink more beer and soft drinks. But in general hot weather is bad for the economy: we slope about enjoying the sun instead of going out and spending our money in the shops.

But this is (a) all about the UK, and (b) concerns the contrast between coldish winters and warmish ones.

Do the absolutely exceptional conditions on the Continent at the moment have further implications over and beyond this general rule that most or all of the growth lost by cold weather is caught up in the spring?

I think they might in two ways. The first is that while the growth may be caught up, there is a loss of welfare. Though GNP may end up the same, people will not feel as rich as they otherwise would have done.

The reason is that higher spending on fuel or higher public spending on clearing up the disruption may boost GDP, but it does not make people feel any richer.

Think of your home; money spent on keeping it warm is money up the chimney, for the house is not any warmer as a result. And in the public sector money spent keeping roads clear, or supporting people out of work as a result of the weather, is money not available for other public services.

The second effect leads on from this. The shortfall of growth in the winter will result in public finances looking even further from meeting the Maastricht targets, both from higher spending and from lower revenues. Eventually some of the latter will be recouped, but not the former. These shortfalls will come at a particularly bad time: a temporary rise in unemployment is tough enough when things are going well, but particularly cruel when they are not.

So while bad weather in general is - on balance - positive for the economy, this particular bout will more likely be negative. There will, come the spring, be a strong bounce, but meanwhile the growth figures will look pretty glum. And it will be core Europe, and in particular Germany, that will be most affected. Great that the Dutch could carry out their skating race. Not so good for the rest of the Continent.

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