WASHINGTON, 8 September 2005 — Hurricane Katrina could hit US growth by up to one percentage point and cause insurance losses to rival the Sept. 11 terror attacks of 2001, congressional budget forecasters said yesterday. But the US economy should weather the storm, the bipartisan Congressional Budget Office (CBO) said in a letter to leaders of the Senate and House of Representatives.
“Katrina could dampen real gross domestic product growth in the second half of the year by half to one percentage point and reduce employment through the end of this year by about 400,000,” it said.
Preliminary estimates suggest that privately insured losses from Katrina “could exceed 30 billion dollars”, compared with about $32.5 billion paid out after the Sept. 11 attacks, it added.
Most economists had expected growth of three percent to four percent during the second half of the year, and employment growth of 150,000 to 200,000 per month, noted the office, which reviews congressional budgets.
But it added: “Economic growth and employment are likely to rebound during the first half of 2006 as rebuilding accelerates.”
The CBO projection chimes with the consensus view of economists who have been predicting that Katrina will shave at least half a percentage point off US growth this year.
The hurricane’s overall effects will be “significant but not overwhelming”, the office said. “Last week, it appeared that larger economic impacts might occur, but despite continued uncertainty, progress in opening refineries and restarting pipelines now makes those larger impacts less likely.”
Nevertheless, the CBO said, Katrina will pack a greater economic punch than previous natural disasters like Hurricane Andrew in 1992, which had a more localized effect on the southeast United States. “Katrina’s effects will be greater because of the greater devastation, the long-term flooding of New Orleans (which will preclude immediate rebuilding), and the destruction of energy and port infrastructure,” it said. Major pipelines taking crude products from the Gulf Coast to the rest of the United States have largely been restored, the CBO noted. “But three of the major refineries that were shut down may not reopen for more than a month, and petroleum production from some oil rigs in the Gulf will be curtailed for many months.”
However, emergency supplies being released from government crude reserves, coupled with extra fuel arriving from overseas, “will dampen the adverse effects of the reduction in supply”, the CBO said.
The insurance losses do not include flood damage, which is not normally covered by private insurers but by federal policy protection. “Although no estimates have been published, federal flood insurance payments are also likely to be substantial,” the CBO said. “Those payments could exceed the program’s reserves and thus necessitate congressional action,” it warned. The CBO said much of the broader economic impact will be felt as consumers divert spending to keep up with the higher gasoline (petrol) prices that have resulted from Katrina.
Assuming consumers reduce non-gasoline spending, on average, by 40 cents for each dollar increase in petrol, consumption would fall by 38 billion dollars. “That effect is temporary: As gasoline prices return to pre-Katrina levels, consumption would bounce back, meaning higher GDP growth,” the CBO said.
