Sun, Aug 10, 2003 page11

• Europe is too hot for business

  HEAT WAVE Industrial output may be threatened as the hot spell and drought in Europe causes power outages, absenteeism and wilts agricultural production

  • REUTERS
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  This summer's soaring temperatures threaten to drive up inflation and stifle industrial output in Europe in the short term as crops wilt and power plants struggle to keep up with rising demand.

  Economists warned that food prices could climb in the coming months after drought throughout the region ravaged crops, while cooling problems that have caused widespread outages at nuclear power plants could dent industrial output at least temporarily.

  The impact on economic activity is diverse, with absenteeism from work a factor in Britain, livestock dying in Spain, and Europe's key water transport network slowing as river levels fall.

  

  Girls enjoy cooling off in a Barcelona fountain on Friday as Europe's searing heatwave continued and was forecast to continue into the weekend, after killing at least 36 people and fanning wildfires across the continent. Meteorologists blame the heat on high pressure reaching from west of the Iberian Peninsula into central Europe, along with a depression from North Africa stretching into the peninsula.

  PHOTO: REUTERS

  A flash estimate of euro zone consumer prices, based on data from Germany and Italy, showed inflation eased to 1.9 percent year-on-year last month from 2.0 percent in June. But analysts said the decline would have been bigger were it not for a drought in Italy that pushed up food prices.

  "The drought has interrupted the downward trend in prices," said Pasquale Diana, an analyst at J.P. Morgan.

  The European Central Bank, which governs monetary policy in the 12-nation euro zone, is largely expected to keep interest rates steady for the time being, but is seen cutting towards the end of the year to boost growth. However, if inflation edges back over two percent it could decide to stay put.

  On the whole, however, economists said they expected little lasting macro economic impact from the heatwave.

  "There has been an impact on prices. Fresh food prices are higher than usual. But this is a short-term phenomenon," said Stephane Deo, senior economist at UBS Warburg in Paris.

  "I don't buy the story that the heatwave will have an impact on industrial output. There may be a slight disturbance, but it will be short-lived and compensated within the month. There's no reason why there should be any impact on growth," said Andreas Rees, an economist at HypoVereinsbank in Munich.

  Heatwave drama

  With temperatures expected to remain well above 30?C until well into next week, electricity demand has surged as citizens from Scandinavia to southern Spain switched on fans and air conditioners to keep cool.

  But power plants are struggling to meet demand.

  Nuclear power production, which accounts for over a third of Europe's energy output, has been severely dented due to cooling problems caused by falling river levels and rising water temperatures, resulting in power cuts and soaring energy prices.

  Consumers could also end up paying dearly for their picnics and barbecues, with bread prices seen climbing as grain crops wilt, while meat prices could also rise as livestock struggle to survive the heat.

  Water levels on major inland shipping routes such as Germany's Rhine river have hit dangerously low levels, raising transportation costs because ships are forced to lighten their loads. Increased costs here could also filter through to consumer price inflation.

  Germany's farmers association has said the heatwave will cost its members over a billion euros, although the country's ZMP market monitoring agency sees little impact on inflation.

  In Germany, retailers' association HDE said the heat was keeping people out of stores and was set to hurt consumer spending just as recent sentiment indicators had pointed to a modest recovery.

  Wilting crops hit CPI

  In Spain, economists said increased poultry mortality could push up chicken prices, bumping up inflation, although greater demand for electricity could help industrial output.

  "In terms of prices, a lot of chicken are dying and chicken is a component of the CPI ... it could have an impact on CPI but it would be short-term," said Julian Cubero, an analyst at BBVA.

  "However, there is greater electricity demand [because of air conditioning] which will have an effect on industrial production," Cubero said. In Britain, retail sales shot up nearly 2 percent in the hottest June in nearly 30 years as sun-loving Britons stocked up on everything from barbecues to tanning lotions to new clothes.

  But as temperatures remained at record levels this month, Britain's crumbling infrastructure has started to wilt. Train speeds have been cut, leaving sweltering commuters fuming and increasing absenteeism, already up because of the hot weather.

  The cost of food staples such as bread and potatoes could also see a heat premium. British bread prices are seen rising by between six and eight pence a loaf after flour millers warned cost rises of around 15 percent -- the largest hike in more than a decade -- would have to be passed on.

  France has also seen a spike in grain prices and farmers expect the heat to hit the maize crop, especially in the south of the country.
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