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Economic Impact of Ash Cloud Rises Daily

April 18, 2010

The Icelandic volcano eruption has already crippled European air travel, but the overall economic impact is only beginning to be understood. The lingering ash cloud could eventually cause holiday cancellations, delay deliveries across the continent and reduce demand for jet fuel.

Businesses from around the globe that rely on air transportation of goods to and from Europe could feel the strain if the volcano continues its relentless assault.

Economists said they have not changed predictions for European growth, and are hoping that normal business could resume this week. But in a worst-case scenario in which the ash cloud closes air travel for months, one expert estimates lost revenue from air travel alone could knock 1 – 2 percentage points off regional growth as long as the event lasts.

The drop would mean that most “European countries wouldn’t get any growth this year,” said Vanessa Rossi, senior economic fellow at Chatham House. If that happens, it would literally stifle the global economic recovery. Compounding the problem is the fact that it is very difficult to predict what will actually happen with the volcano. Even geologists can’t tell us what is going to happen, Rossi said.

The questions on the minds of economists now are how long the volcano will continue erupting and spewing ash into the air, where the ash gets carried by the jet stream, and how long the ash will remain in the atmosphere over Europe.

According to vulcanologists and meteorologists, there are no current answers to any of those questions, as volcanoes are quite unpredictable. They are warning, though, that when the last Icelandic volcano erupted, it lasted more than a year.

Europe accounts for a third of the entire global gross domestic product, which is estimated at roughly $3 trillion. Most European travel occurs in the summer months, so most economists feel all would not be lost. However, Rossi estimates that a long shutdown could cost up to $10 billion weekly in the travel industry. Transportation analysts estimate that the impact will be greater, as almost 40 percent of Europe’s shipping is done by air.

Many air freight operators say they are moving as much as possible by land and looking into plans for using southern European airports that are outside the ash cloud. But they do admit deliveries will be affected greatly.

Customers relying on UPS and FedEx for overseas shipping are out of luck as well. “If your just-in-time operation is depending on parts that come from Asia or the U.S. or Africa or the Mideast… , you just can’t get it,” said United Parcel Service Inc spokesman Norman Black. “DHL and UPS use airhubs in Germany, Fedex Corp relies on an airhub in France and all that airspace is closed. There’s just not an option right at the moment while we all wait and see how long this is going to take.”

Most pharmaceutical firms are not in danger, as they report having enough stocks to avoid a short-term crunch. High-tech imports between Asia and the United States are flown over the Pacific and will be unaffected, but European firms may feel the pinch.

Most foods are delivered by sea, but some premium products are moved by air and are no longer able to be shipped until the air clears.

Some of the most vulnerable national economies that could suffer the shutdown are African producers of fruits and flowers. Their products will swiftly perish if not shipped to market immediately.

“Kenya, as the largest supplier of cut flowers to Europe, where tourism is also an important sector, is likely to be the most vulnerable; followed by the East African soft commodity producers more generally,” said Standard Chartered chief Africa economist Razia Khan, herself stranded in Botswana by a cancelled flight.

The shutdown is estimated to be costing airlines $200 million a day in losses, according to the International Air transportation Association. The effect is causing chaos well beyond the immediate European airspace. Most airlines are not insured for this loss, although insurance firm Munich Re said on Friday it would consider future cancellation insurance should the crisis produce a demand.

The shutdown is reducing the demand for jet fuel by nearly 2 million barrels a day, which undermined jet fuels prices last week. If the shutdown continues for a prolonged period, it could filter into oil and gas prices.

Because of the economic crisis, governments don’t have the money to provide financial support to businesses that could lose money from the shutdown. The situation could be enough to push some smaller airlines to the edge of bankruptcy. Other businesses that rely on air travel for tourism may also feel the strain if the shutdown lasts too much longer.

Image Caption: The ongoing eruption of Iceland’s Eyjafjallajokull volcano is seen in this pair of images acquired April 15, 2010, from the Moderate Resolution Imaging Spectroradiometer (MODIS) instrument on NASA’s Terra spacecraft. At left is a natural-color visible image, while the right image is a composite of MODIS thermal infrared channels. Image credit: NASA GSFC/JPL

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