Blog Post

Hurricane Harvey’s economic impact

What’s at stake: tropical storm Harvey has caused unprecedented and catastrophic flooding in southeastern Texas. We review recent estimates of the economic impact of this natural disaster.

By: Date: September 4, 2017 Topic: Global Economics & Governance

Are natural disasters becoming more expensive? Back in 2012, the IMF released a study finding that over the previous two years, 700 natural disasters were registered worldwide affecting more than 450 million people. Damages were estimated to have risen from $20 billion on average per year in the 1990s to about $100 billion per year during 2000–10. The Economist also has an interesting chart showing how the number of weather-related disasters is increasing but the death toll is decreasing (see below).

Figure 1

NASA’s Earth Observatory points out that natural disasters may be getting more expensive because more people are building more expensive infrastructure in areas that are prone to natural disasters, like coastal areas, fire-prone forests, steep mountain slopes, and riverbanks. In addition to increasing the cost of natural disasters, population growth and the landscape changes that go with it may make some disasters more severe. For example, when a swath of trees becomes a neighborhood or an office building, the ground changes from spongy, water-absorbing soil to impervious pavement.

On FiveThirtyEight, University of Colorado’s Roger Pielke Jr. also agrees that that natural disasters cost more than ever (Figure 2) and he argues that this is linked to social changes, i.e. the numbers reflect more damage from catastrophes because the world is getting wealthier.

Figure 2

Source: FiveThirtyEight

Pielke points out that the data show an inverse relationship between lives lost and property damage: modern disasters seem to bring the greatest loss of life in places with the lowest property damage, and the most property damage where there’s the lowest loss of life. This is linked to the different ability to cope with disasters that countries have at different levels of income. As countries become richer, they are better able to deal with disasters — meaning more people are protected and fewer lose their lives, although the cost in terms of property losses increases.

Michael Grunwald on Politico argues that Harvey was a disaster foretold and Washington made it worse. He cites a 1998 report by the National Wildlife Federation which argued the U.S. government’s flood insurance program was making catastrophes worse by encouraging Americans to build and rebuild in flood-prone areas. Created in 1968, the National Flood Insurance Program was supposed to help prevent risky development by demanding that new construction within designated 100-year floodplains to meet higher flood-proofing standards and by requiring “substantially damaged” properties that received claims worth half their value to be relocated or elevated.

But Grunwald argues that most of the program’s 100-year flood maps are obsolete, relocation almost never happens, and the government has instead continued to cut multiple checks for repetitive losses, thus creating a bad incentive. An October 2016 Pew report also comes to similar conclusions. Flooding is the most costly and most common natural disaster in the United States and the Federal Emergency Management Agency’s National Flood Insurance Program (NFIP) provides federally backed coverage for homeowners and small businesses in more than 22,000 communities across the country. The report shows how repeatedly flooded properties cost billions, arguing that new policies are needed to break a cycle of loss and rebuilding.

FT’s Alistair Gray reports preliminary estimates from Moody’s Analytics, according to which the storm will exact a toll of between about $50bn and $75bn (see Figure 3 below). The insurance industry is expected to avoid picking up much of the cost, as many householders lack cover for flooding (standard US home insurance policies exclude flood damage). As mentioned above, householders can get cover from the National Flood Insurance Program (NFIP), but only about one in six properties in the county in which Houston is located has the protection. Relatedly, FT’s Joe Rennison reports that storm Harvey has put up to $30bn of securitised commercial mortgages on the watch list of analysts and investors, as damage from the disaster has heightened the risk of defaults.

Figure 3

FT Alphaville has a good summary of early estimates for Harvey’s economic impact. J.P. Morgan’s insurance industry research team estimate that the physical damage will be in the $10-$20 billion range. The midpoint of the $10-$20 billion range is about 0.1%-pt of GDP. Total damage, and total rebuilding, should be greater than this amount, but they expect the overall impact on GDP in Q3 and Q4 to be quite small. Goldman Sachs argues that property losses will not be directly visible in most economic indicators, but major hurricanes in the past have been associated with a temporary slowdown in retail sales, construction spending, and industrial production, as well as a pickup in jobless claims. They estimate that Harvey has already shut down over 16.5% of US refining capacity, and that disruptions in the energy sector could directly reduce Q3 GDP growth by as much as 0.2pp. Deutsche Bank  thinks that in the short-term, the most visible impacts will likely be to exports and industrial production, although some of the negative hit to growth will likely be offset by a boost to construction spending as rebuilding efforts get under way.

Bill McBride at Calculated Risk says that we can look back at Katrina (and Rita) for gauging the potential impact of Harvey on unemployment claims (Figure 3) . Hurricane Katrina made landfall on Aug 29, 2005. Unemployment claims moved higher over the next month, and stayed elevated for a couple of months. Claims also spiked following 9/11 and after Hurricane Sandy in late October 2012. The increase following Sandy was significant, but only lasted a few weeks (so the 4-week average didn’t increase as much as for Katrina). McBride’s expectation is that the 4-week average of claims will increase from the current level of 238,000 to over 300,000 over the next month.

Figure 4

Source: Calculated Risk


Republishing and referencing

Bruegel considers itself a public good and takes no institutional standpoint. Anyone is free to republish and/or quote this post without prior consent. Please provide a full reference, clearly stating Bruegel and the relevant author as the source, and include a prominent hyperlink to the original post.

View comments
Read article More on this topic More by this author

Opinion

Immigration: The doors of perception

Surveys show that people systematically overestimate the share of foreign-born citizens among resident populations. Aligning people's perceptions with reality is vital to the betterment of public debate and proposed policies.

By: Inês Goncalves Raposo Topic: Global Economics & Governance Date: December 12, 2018
Read article More by this author

Blog Post

Les gilets jaunes

For weeks, protesters wearing yellow motorist vests have taken to the streets of Paris to protest against the rising price of fuel. They have since taken on a wider role, and are seen as symbols of the growing popular discontent with President Macron. Silvia Merler reviews scholars’ opinions about this movement.

By: Silvia Merler Topic: Energy & Climate, European Macroeconomics & Governance Date: December 10, 2018
Read article More on this topic More by this author

Opinion

The great macro divergence

Global growth is expected to continue in 2019 and 2020, albeit at a slower pace. Forecasters are notoriously bad, however, at spotting macroeconomic turning points and the road ahead is hard to read. Potential obstacles abound.

By: Jean Pisani-Ferry Topic: Global Economics & Governance Date: December 5, 2018
Read article More by this author

Blog Post

Green central banking

A few weeks ago, Silvia Merler discussed the rise of “ethical investing”. A related question emerging from the discussion is whether central banks should also “go green”. Silvia reviews the latest developments and opinions on this topic.

By: Silvia Merler Topic: Energy & Climate, Finance & Financial Regulation Date: December 3, 2018
Read article More on this topic More by this author

Blog Post

Machine learning and economics

Machine learning (ML), together with artificial intelligence (AI), is a hot topic. Economists have been looking into machine learning applications not only to obtain better prediction, but also for policy targeting. We review some of the contributions.

By: Silvia Merler Topic: Innovation & Competition Policy Date: November 29, 2018
Read article More on this topic More by this author

Blog Post

The Brexit withdrawal agreement

On November 14th the UK government cabinet approved the draft text of the withdrawal agreement, the deal reached between EU and UK negotiators. The decision was followed the next day by the resignations of several members of Parliament. We review the first reactions in the blogosphere.

By: Silvia Merler Topic: European Macroeconomics & Governance Date: November 19, 2018
Read article More on this topic More by this author

Blog Post

US mid-term elections and the global economy

Democrats won control of the House and Republicans held onto the Senate in the most consequential US mid-term elections in decades. Bowen Call reviews economists’ and scholars’ analyses of the impact this might have on the world economy.

By: Bowen Call Topic: Global Economics & Governance Date: November 12, 2018
Read article More on this topic More by this author

Blog Post

Jair Bolsonaro’s Brazil

Far-right candidate Jair Bolsonaro won the Brazilian presidential elections after a highly polarising campaign. We review economists’ and scholars’ views of what this means for Brazil going forward.

By: Silvia Merler Topic: Global Economics & Governance Date: November 5, 2018
Read article More on this topic More by this author

Blog Post

The rise of 'ethical' investing

We are used to think about the value of investment as measured by financial return. But investing with an eye to environmental or social issues and, more generally, ethical considerations, has become more prominent. We review contributions to this debate.

By: Silvia Merler Topic: Finance & Financial Regulation Date: October 29, 2018
Read article More on this topic More by this author

Blog Post

The United States-Mexico-Canada free trade agreement (USMCA)

While final ratification of the USMCA (also known as Nafta 2.0) is pending, we review economists’ assessment of the agreement.

By: Silvia Merler Topic: Global Economics & Governance Date: October 22, 2018
Read article More on this topic More by this author

Blog Post

The 2018 Nobel Prize: Growth and the environment

The 2018 Nobel Prize in Economic Sciences has been awarded jointly to William Nordhaus and Paul Romer for integrating respectively climate change and technological innovation into long-run macroeconomic analysis. We review how economists reacted to the announcement.

By: Silvia Merler Topic: Energy & Climate Date: October 15, 2018
Read article More on this topic More by this author

Blog Post

Inequality in China

After amply discussing income inequality in Europe and the US, economists are now looking at the magnitude, implications and possible remedies for this phenomenon in the context of the Chinese economy.

By: Silvia Merler Topic: Global Economics & Governance Date: September 24, 2018
Load more posts