UK: SMITH ON ECONOMICS - UNPREDICTABLE WEATHER AHEAD. - The economic effects of the weather have never been confined to agriculture, says David Smith. And global climate change will make it a topic that no business can afford to ignore.

Last Updated: 31 Aug 2010

The economic effects of the weather have never been confined to agriculture, says David Smith. And global climate change will make it a topic that no business can afford to ignore.

I have always thought it unfair to suggest that the British are peculiarly obsessed with the weather. In my experience, obsession with the weather is normal human behaviour the world over. They have entire television channels devoted to it in the US. I mention this because economists have often struggled and failed to come up with satisfactory explanations about how weather affects economic activity.

About a century ago William Stanley Jevons, a famous British economist, advanced his 'sun spots' theory of business cycles, which explained variations in economic activity in terms of agricultural harvests. Good harvests meant periods of economic plenty, with poor harvests implying the opposite.

Even today, such effects are evident. Successive poor grain harvests in the US have had an impact on grain prices, which in turn have affected commodity price inflation.

The macroeconomic impact

Surely such explanations do not have much of relevance to say of modern economies where agriculture plays only a small part? I am not so sure.

We are all familiar with the problems that a series of dry summers have created for the privatised water companies. Brewers and the manufacturers of ice-cream can measure the effects of a hot summer in terms of their sales. Energy demand is directly related to temperature, as is evident from any cold winter. Such effects are important for individual industries, but do they not cancel out in the aggregate? What is good for ice-cream sales is surely bad for the umbrella manufacturer, and the net effect must be neutral. While this sounds plausible it is almost certainly wrong.

The weather does have an impact at the macroeconomic level and at times it can be a significant one.

Leo Doyle, an economist at Kleinwort Benson, the investment bank, has done some calculations on these weather effects. His results, published earlier this year, are fascinating. He estimates that last winter's severe weather depressed first quarter gross domestic product (GDP) by about 0.25%. This does not sound too much, except for the fact that the quarterly rise in GDP was just 0.4%. If the economy grows by 0.4% a quarter, we can safely say it is growing below trend (the trend growth rate being 2.5% a year).

But if it had grown at 0.65%, this would have been above trend with implications for decisions by the chancellor of the exchequer and the Bank of England governor on interest rates. A cold winter hits construction activity, car sales (few individuals want to buy a new car when the roads are icy), tourist spending in Britain, travel, sports and leisure, sales of carpets and household goods. It benefits spending on fuel and power and on clothing, but the overall impact is negative.

Pity the poor retailer

To a certain extent swings and roundabouts are in operation, with the effects of a bad winter likely to be recouped when the weather picks up.

New car sales to private buyers, for example, picked up strongly as soon as the worst of the winter weather was over. Weather effects can delay rather than eliminate economic activity.

In other respects, however, weather effects can be permanent. Clothing retailers know to their cost that a mild winter will mean racks of unsold overcoats and woollens, many of which will be difficult to shift the following year. A poor summer can have a similar effect on sales of warmer weather lines.

Retailers can fine-tune weather effects to the month. The ideal climate pattern is one where the seasons exert themselves early. If it is going to be a harsh winter, far better for clothing sales if the bad weather shows up in November and December. Cold weather that hits late, say in the second half of February or March, may do little good. By then customers may decide that they can hang on for a few weeks until spring appears, and those overcoats will remain unsold. And although an Indian summer may be very pleasant for us, it does little to boost sales of cotton dresses and swimming costumes because it is too close to the end of the season.

An extremely hot summer, like a very cold winter, has a depressing effect on activity. During last year's heatwave, for example, retailers noticed a new phenomenon - the weather was too hot for customers to want to go shopping at all. Hence, most categories of spending suffered. Who wants to buy kitchen appliances, curtains, or even clothes when the weather is so hot? The positive effects of the hot weather - more Britons choosing to holiday here rather than abroad, for example - were outweighed by the negative. Overall, the weather probably knocked 0.3% off consumer spending. An interesting question is whether very hot weather has more general adverse effects on work effort and therefore productivity. As northern Europeans, we don't, of course, go in for such things as siestas. But a very hot summer can test even the sternest work ethic.

Extra element of uncertainty

One thing that all businesses will have to cope with is greater unpredictability in the weather. This, according to received scientific opinion, is a symptom of global climate change. Research by NASA, the American space agency, suggests that weather extremes will become more pronounced, even in countries like Britain where temperature variations between the seasons have traditionally been small.

A changing climate creates as many business opportunities as it destroys - but only as long as it is relatively predictable. Unpredictable and more extreme weather patterns can lead to problems in distribution, given the British transport system's inability to cope with more than a few inches of snow. It can mean that seasonal demand patterns will break down, requiring retailers to hold a greater range of all-weather stock. Above all, it is an extra uncertainty that business could do without. Rather than being obsessed with the weather, perhaps we do not pay enough attention to it.

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