With another two weeks still to run in the UK election, this week I decided to cover the other news item that's been on everyone's lips – Eyjafjallajokull.
The Icelandic volcano – pronounced 'hey, ha' for short – paralysed European air travel for several days, shutting down British airspace completely. But apart from an interesting debate about the value of human life – just what potential cost are we prepared to accept for the risky privilege of sitting in a fast, flying metal tin? – the macroeconomic consequences are also interesting.
The disruption to travel means that some business will just not have been done – firms and clients will have been unable to meet up as expected. (This is potentially most serious for Greece, as its meetings with the IMF and EU were delayed, giving spreads more time to widen.) But it is also likely that businesses found ways around the disruption. Tele- and video-conferences are not perfect substitutes for face-to-face meetings: but they are at least an alternative. And where supply chains were disrupted, firms may have been able to rely on inventories or contingency plans (on this point, can anything stop Tesco?). But, ultimately, even if firms were unable to complete contracts or do business at all, in the vast majority of cases the disruption will have been a delay – not a permanent loss of activity altogether.
At the same time, of course, various entrepreneurial individuals will have made significant gains from the disruption. Cars hires and long-distance taxis have made a killing – one of my neighbours recently picked up a week's takings in a day. Ferries and trains have also benefited. From a macroeconomic perspective, displacement, rather than outright loss, is once again the theme. And while some unscrupulous individuals may have dared to raise prices – it's all about supply and demand, even here – the impact of the disruption on travel, food and import prices will be temporary. One exception may be insurance premiums, if insurers start covering future eruptions and plan for payouts – but even here any impact would be tiny, especially as volcanic eruptions are a classic 'act of God', not covered by your average retail insurance contract.
All told, then, the volcano may have hit activity, but only temporarily. Business is likely to catch up in the next few weeks and, for Q2 as a whole, it may be difficult to see any noticeable impact on GDP growth in either the UK or the euro area. It is worth remembering that flight cancellations hit both sides of the trade balance (imports and exports). As such, the recent volcanic disruption completely pales into economic insignificance when compared with the financial crisis and global recession, which have probably left lasting scars on advanced economies – national income in the UK will be permanently lower as a result of the financial sector royally messing things up. In that sense, at least, volcanoes are not as dangerous as bankers.