US tropical storms: possible economic impact

It is not yet possible to get a full picture of the devastation caused in the US by the two tropical storms “Harvey” and “Irma”. While it is therefore still too early to provide an exact analysis of the economic impact of the storms, a few conclusions may even be drawn at this point. Overall, experience shows that the impact of natural disasters (hurricane “Katrina” in 2005 and “Sandy” in 2012) on economic growth is only short-lived and the slumps following immediately in the aftermath of a storm are generally made up again by the subsequent reconstruction measures. However, short-term negative economic fallout is to be expected, especially given how close together “Harvey” and “Irma” occurred, as well as the fact that two important regions, namely Texas and Florida, were affected at the same time.

With hurricane “Harvey” hitting Houston, the fourth-largest city in the US, many oil refineries have been affected and the price of crude oil climbed in its wake from less than USD 46.00 to 48.5 per barrel. Hurricane “Irma” weakened having made landfall on the west coast of Florida. Some three million residents in Florida are currently thought to be without power. No supplies are being delivered to petrol stations, leaving around 6,000 closed. The tropical storm has also impacted on the grain harvest. We could see a temporary rise in inflation, as hurricane “Harvey” has affected important parts of the US energy infrastructure, with average petrol costs soaring by around 14%. The crop failures could also drive up food prices temporarily. Given their temporary nature, the central banks however are unlikely to factor these price increases in monetary policy decisions, especially since they are expected to have a limited impact only on the core rate.

The important issue for the Fed is likely to be the expected job losses and parallel rise in energy prices, which will have a significant impact on private household expenditure and therefore on private consumption. The latest increase in initial claims for unemployment benefits show that “Harvey”, which reached the US coast on 25 August, will probably lead to a decline in new jobs at least in the short-term and therefore to a higher unemployment rate. At the next release on 14 September, two factors are likely to drive up the initial claims for unemployment benefits. On the one hand, initial claims after “Harvey” should be hesitant at first, as those people affected will initially try to overcome the catastrophe. On the other, hurricane “Irma” should lead to another surge in initial claims. “Irma” led to a total of some six million people being urged to get to safety.

All in all, the damage caused by the hurricanes could have short-term implications for the growth prospects in particular. The threat of an economic downturn at least cannot be totally dismissed. Different estimates put the impact at between 0.4 to 0.6 percentage points. The question remains as to whether the central bank will respond to the expected weakness in the third quarter with a prolonged break in the rate tightening cycle. This option cannot be ruled out. A key rate hike this coming December is therefore becoming less likely. Previous experience shows that the Fed tends to defer indicated key rate steps in the event of major uncertainties and risk events (for example, Brexit).

Finally, the two tropical storms are expected to affect the US state budget, as only some of the damage will have been insured. The US government has already approved billions of dollars in aid to the victims of hurricane “Harvey”. With the debt ceiling set to hit again in mid-December, additional aid for those affected by “Irma” could lead to considerably higher expenditure. In this environment, it will become increasingly more difficult for president Trump to push through a tax reform, especially since funding this reform would impose a further burden on the state budget. Scope for tacking the funding of the tax reform is not expected to be created before the start of December, when the debt ceiling debate is reignited. Positive stimuli for the economy are therefore not expected before the New Year at the earliest. Accordingly, US growth will most probably be dented in the fourth quarter.

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