Scotland's weather: Fears grow that economy will catch a cold

• Osborne: optimistic forecast thrown into doubt by weather

WITH the spectre of public sector cuts looming large, the last thing Scotland needed was another blow to its economy.

But experts are warning the big freeze could be costing the country up to 70 million a day and could plunge the ailing economy ever-closer to the dreaded double-dip recession.

Last week, Chancellor George Osborne suggested the recovery was "on track" after the Office for Budget Responsibility upgraded its growth forecast for 2010. However, with many smaller roads still impassable this weekend and Scots still struggling to get to their workplaces amid widespread transport disruption, the unrelentingly bitter weather conditions could pose a major setback. The immediate effects of the harshest winter in 45 years are already manifesting themselves in deserted shopping malls, convenience store shelves stripped of bread and milk and petrol forecourts running dry.

According to the Retail Motor Industry Petrol Retailers Association, around 500 forecourts could close as a result of the delays caused by tankers being unable to leave refineries, including Grangemouth. What has mitigated the closures so far has been a huge fall in road traffic of up to 10 per cent as cars have been abandoned for public transport.

Over the next few weeks, though, the real price may be paid by small businesses whose cash flow has been destroyed by the freeze keeping their customers away. Bearing in mind last year's big freeze – which spanned around three weeks in late December/early January and didn't include much of the Christmas shopping period – was said to have cost the UK 7 billion, the impact on the economy could be enormous.

Dave Clarkson, head of private business for PricewaterhouseCoopers in Scotland, said it was reasonable to assume the country would lose 20 per cent of its GDP a day as long as snow continued to curtail activity.

"I don't think Scotland has yet got a fair wind behind it – it is lagging behind the South as far as the recovery is concerned," he said. "Whether the big freeze is enough to push it back into a double dip recession, I really don't know – but it certainly won't be helping."

The worst-affected industries will be those whose employees cannot work from home – such as construction and manufacturing – but small businesses, who are already having liquidity problems will also be hard-hit as their cash flow dries up.

A survey by the Bank of Scotland suggested last winter's big freeze cost the country's small businesses 716 million in lost income, with only 10 per cent benefiting from the inclement conditions.

Stuart Mackinnon, of the Federation of Small Businesses in Scotland, says many businesses learned the lessons of last winter and developed a set of contingency plans. Research from the FSB's "Voice of Small Business" Index suggests four in 10 (42 per cent) put in place policies for remote working, three in 10 (30 per cent) offered flexible working hours and 17 per cent bought their own supply of grit and salt.

"Some of the spending will just be delayed," Mackinnon said. "If you can't go out to buy your Christmas presents today, you might go out again when it eases off, but for other businesses which rely on passing trade the impact will be greater."

The problem is that many small businesses are in poor financial shape to cope with even a short-term loss of income.

"The recession means there are more firms than usual close to the verge of bankruptcy," said Douglas McWilliams, chief executive of the Centre for Economics and Business Research, which predicts the snow could send hundreds of Scottish firms over the edge. "The lost daily productivity is largely a cost to business. If, in addition, it leads to delayed payments, the combined hit on profits and cashflow could send some businesses who might be close to the brink into premature bankruptcy," he said.

The Scottish housing market – which slowed this autumn – is also likely to be adversely affected. "The housing market in Scotland outperformed the rest of the country until October when it began to fall in line with everywhere else, probably because of the uncertainty caused by the public sector job cuts," said Sarah Speirs, deputy director of the Royal Institute of Chartered Surveyors Scotland.

"The snow won't help matters. Clearly people don't want to travel, so they aren't going to view houses. And then there's the issue of the damage this weather is doing to properties; if you have a burst pipe, or slates off the roof or guttering down - that's just one more thing to think about before you could put it on the market." There are some more optimistic forecasts, however. According to some economists, the cost of prolonged bouts of inclement weather – though huge when calculated on a day-to-day basis – has little long-term impact on the economy. "All the past research shows the long-term impact on GDP is surprisingly small," said McWilliams. "This is especially true at present when many businesses are still working below full capacity.

Much of the productivity lost is made up fairly soon afterwards."

This will be little consolation, however, to the restaurants facing cancelled parties, the high street shops forced to close their doors early, the grocery shops in outlying areas struggling to get supplies or the drivers trying to deliver to them.

Glasgow-based company Filshill wholesalers, which supplies tobacco, crisps and confectionery to 1,600 convenience stores all over Scotland and the north-east of England, is at least a day-and-a-half behind as a result of poor road conditions, and particularly the closure of the M8 early last week. "The biggest problem was that when we started out on Monday, we couldn't get to places on the east coast such as Aberdeen, east Fife, Edinburgh and the Borders. We had five lorries out and we made only two deliveries, which created the backlog," said sales director Ian McDonald.

"The problem now is not on the main routes, it's on the side roads where a lot of our customers are. Unfortunately, there's lots of abandoned cars in these roads. The trucks can't stop to make that delivery and that causes problems."

The Road Haulage Association said its members were struggling with deliveries, with petrol forecourts, convenience stores and farms amongst the worst-affected.

So great are the problems that an increasing number of hauliers are asking for a partial relaxation of Vehicle and Operator Service Agency rules on how many hours drivers can work.

Drivers have also been hindered by a lack of staff to help unload goods when trucks finally get there. "The weather has played havoc with hauliers' schedules," RHA policy director Jack Semple said.

According to the Scottish Retail Consortium, bigger food retailers have "robust and flexible" distribution systems which allow them to cope even in severe weather, while Jim Maitland of the National Federation of Retail Newsagents said his shop in an Aberdeen suburb had actually benefited from people shopping closer to home.

"Most of my goods come from local suppliers. We have a baker who works out of Huntly and he has managed to get through every day – the latest he's been is 10am. I am also able to pick up supplies myself from the local cash-and-carry.

"As a result I have been OK while the nearby supermarket – which depends on food delivered from further afield – has had little in the way of supplies."

But the Scottish Grocers' Federation admitted many of its members were running out of essentials. "In one sense, local stores benefit from weather like this – people don't want to travel and shop closer to home," spokesman Kate Mackie said. "Suppliers have also been making a heroic effort to deliver; in one instance a milkman who couldn't get his vehicle to a particular shop carried crates two to three hundred yards to the door.

"But there are shops, which are running out of things like bread and milk." Their problems are being exacerbated by panic buying, with customers buying in bulk to be on the safe side.

"Shops have been urging their customers not to do that. Indeed I heard of one which was limiting customers to one loaf," she said.

Despite the sense of chaos that seems to be enveloping the county, Professor Brian Ashcroft of the Fraser of Allander Institute, believes the impact on the economy will not be as great as it would once have been.

"I think we have a more flexible economy now; developments in computers, and telecommunications mean it's much easier to do business in many locations, people are much less tied to offices, which makes it easier to adapt to circumstances such as these where largely the problem is one of getting to work," he said. Many of those who cannot get to the office will be working at home, and even where they're not, their colleagues may be working even harder to cover the shortfall, or they may be able to catch up later by working harder."

Ashcroft also pointed out that while some shops may be seeing a drop in trade, sales in weather-specific goods such as winter clothing, boots, ski gear, sledges and salt are thriving. A shift from the High Street to online shopping might affect the Scottish economy as there are no Scottish representatives in the top 100 UK e-commerce companies.

However, with cars and properties suffering weather-related damage, repair firms stand to benefit, and there is bound to be a rise in energy consumption.

None of this means companies should rest on their laurels, though. Dave Clarkson insists businesses, particularly those in the construction or manufacturing industries, must not shrug their shoulders and say "it's only a few days, we can manage.

"If this goes on for 30 or 45 days and your downtime is anything from 20-50 per cent of capacity then that's a real impact on your business and you need to have a contingency plan," he said.

"Depending on which business you are in, you might want to ask what other countries do. What does Canada do when it's faced with this year in year out, what do they do for the three months of downtime? Can we learn anything from that?

"How flexible are they? Can they move their operations to warmer climates for two or three months of the year?

"I just think each business needs to understand what the options are and think about a plan rather than throwing their hands up in horror when it happens and screaming about the problems."