ECONOMIC IMPACT OF HARVEY AND IRMA

Sep 26, 2017 Editorial

Hurricane Harvey was a tragedy that could have considerable impact on both the economy of Texas and the broader US economy. It could also have material implications for both commodities and insurance markets. Early estimates have put the property damage at between US$80 billion and US$100 billion — between 0.4 percent and 0.6 percent of the US Gross Domestic Product (GDP).
However, the rebuilding cost could actually be much larger. Harvey has caused a spike in gasoline prices and has boosted consumer prices by 0.3 percent. Whether there is a lasting impact on the US GDP would depend on the damage to infrastructure.
The economic impact of hurricane Harvey which struck at the heart of the US energy facilities in Texas has been felt far and wide. Over one-third of the US refining capacity was affected by the hurricane and had to be shut down. This caused the partial closure of the Colonial pipe line which delivers gasoline and other petroleum products from Houston to the North Eastern states. As a result, gasoline prices increased by 30 cents per gallon in one week.
Meanwhile, estimates for the damage caused by Harvey may take weeks before it is known. This is also true for the cost of residential insurance. But early indications are that many homeowners could bear a substantial portion of the insurance costs because they may not have had flood or storm damage insurance coverage.
In short succession, Irma, a Category five hurricane and the most powerful Atlantic Ocean storm in recorded history, caused widespread destruction in several Caribbean Islands and Southern Florida, reducing buildings to rubble and leaving dozens of people dead.
However, the full impact of hurricane Irma on the Caribbean is yet to be assessed. The small island of Barbuda is barely habitable with recovery efforts expecting to take years. Other Caribbean islands also severely impacted by Irma include Anguilla, St Kitts and Nevis, the British Virgin Islands, the Turks and Caicos Islands, the Bahamas, Haiti, Cuba, Puerto Rico and the Dutch and French dependencies. Guyana, Trinidad and Tobago and Jamaica have already pledged aid to some of the countries devastated by the hurricane.
The Caribbean is one of the most vulnerable regions in the world to natural disasters. Intense hurricanes have cause damages that have wiped out several years of the islands Gross Domestic Product (GDP). Most of the islands are scrambling to put together the necessary resources to finance the recovery and reconstruction costs.
Their limited budgetary capacity prevents them from establishing sufficient funds to absorb the cost of rebuilding.
The impact of a hurricane on the islands is felt mostly in the destruction to buildings, agricultural crops, roads and tourism. Climate scientists believe that there is a connection between climate change and the intensity of hurricanes.
They have found a strong correlation between the potential destructiveness of hurricanes and warmer sea surface temperature of above 26.5 degrees Celsius. Therefore, as the climate warms, and sea surface temperature increases, it is expected that the intensity of hurricanes will increase.
There is a Caribbean Catastrophe Risk Insurance Facility (CCRIF), but it does not have sufficient funds to cover the costs to rebuild the islands devastated by Irma. The region should establish a catastrophe fund in which all the countries will contribute with assistance from international donors to finance the rebuilding of their infrastructure after a hurricane. The catastrophe could be a safety net for the Caribbean islands given their vulnerability to natural disasters.
In the past, most of the islands had to borrow to rebuild their infrastructure destroyed by hurricanes. Grenada which was devastated by hurricane Ivan in 2004 costing over US$800 million in damage is a case in point.

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