April 20, 2010 / 2:17 PM / 9 years ago

Scenarios: What if volcano disruption lasts weeks, months?

LONDON (Reuters) - Experts say they cannot predict the duration of the volcanic ash cloud that continues to disrupt European aviation, and hence its economic impact.

European air traffic could return to normal within days, or the disruption could last months. Below are three scenarios looking at the market and economic impact if the crisis lasts a further week, a month or six months or more.

DISRUPTION FOR A FURTHER WEEK

If the disruption lasts for a second week, the economic impact will increase sharply.

— Many stranded travellers would manage to return home but would not be replaced by new visitors, leaving hotels that have done a brisk trade this week facing lower occupancy.

— Airline stocks would fall sharply, with much depending on whether governments sounded open to the idea of a bailout.

— Crude prices would be further undermined, and the currency market impact seen so far would be exacerbated. The Kenyan shilling and Turkish lira would remain under pressure on worries about horticulture and tourism.

— More firms would begin to suffer from lack of supplies normally delivered by “just-in-time” air cargo. Some manufacturers would lack of essential components, supermarkets would go short of flowers, fruit and vegetables from Africa, some pharmaceutical firms might run short of supplies.

— Supply chains would become more flexible. Some supermarkets are already flying in perishable goods from Africa to Spain then trucking them to destinations under the ash cloud. Logistics firms are setting up hubs at airports that are still operating, then using bikes and vans within the affected area.

— The impact on gross domestic product is hard to calculate, and much will depend on the degree of disruption. Areas of European airspace were opening and closing on Tuesday as the cloud moved, and this is hard to predict and impossible to model. Capital Economics said it doubted the disturbance would not knock more than about 0.1 percent off British or euro zone GDP in the second quarter.

— PricewaterhouseCoopers estimates a week of disruption would destroy around 0.025-0.05 percent of annual British GDP, and the same would probably be true of other European countries.

DISRUPTION FOR A MONTH LONGER

— This would force many firms to revolutionize the way they operate. Conferences and meetings would be canceled, not only during the month itself, but also possibly later in the year.

— Logistics firms might adapt better, reducing the impact by using other hubs or delivery methods. The travel and tourism industry would suffer seriously, particularly in Mediterranean economies such as Turkey, Greece, Italy and Spain. Even if the cloud cleared by the end of May, summer holiday bookings in Europe would likely be seriously affected. Capital Economics estimates a 10 percent fall in visitors would lower Greek, Spanish and Portuguese GDP by around 1 percent this year.

— A month-long disruption would almost certainly impact quarterly European GDP, although by how much is impossible to work out without knowing the degree of disruption and how well firms react. Some economists say there are too many variables for it to be worth modeling.

— Airlines would push governments very hard to relax restrictions, putting policymakers in an awkward position. If European airspace turned out to be 99.9 percent safe, with 20-22,000 flights a day that would still mean some 20 aircraft a day suffering ill effects or engine failure. Any crash would be politically disastrous for both airlines and policymakers.

— Travel delays would almost certainly slow the European and IMF response to Greece’s debt crisis. The postponement of the IMF-EU meeting on Monday pushed Greek bond yields higher, and any further delays would also be taken badly by markets.

CRISIS LASTS SIX MONTHS

The last eruption of this volcano lasted over a year, so this cannot be ruled out.

— Airlines and governments would be desperate to get the flights operating again, and would have to be convinced the airspace closure was necessary if they were to maintain it.

— Even intermittent disruption could be devastating in terms of lost bookings. Logistics firms might adapt relatively quickly, getting manufacturing back on line, but some aerial commodity shipping might simply cease if no other cost-effective method was available.

— The impact on the travel and tourism industry over the peak summer period would have a marked impact on GDP. Some economists suggested it might be enough to push Europe back into recession. Chatham House economist Vanessa Rossi said if the sort of total shutdown seen over the weekend continued over the summer it could shave 1-2 percent off European GDP.

— The impact would vary sharply from country to country. In Britain, losses from absent American and European tourists might be more than offset by Britons holidaying at home. In the Mediterranean, the impact would almost certainly be negative. South Africa would suffer badly if the World Cup was affected.

— The IMF and EU would have to find ways of organizing aid packages that did not require frequent visits or risk delaying financial support to a string of countries across Europe.

Editing by Tim Pearce

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