John Carran, Senior Economist at Gareth Morgan Investments
Much has been reported about the devastating effects of 'Superstorm Sandy' on the United States. John Carran looks at the impact the storm may have on the US economy, as well as the potential effect on the wider global economy.
Interviewer: John, ‘Superstorm Sandy’ has recently hit the Eastern seaboard of the United States, obviously with a devastating impact on people’s lives. But what about the economic impact on America?
John: It is a very significant event, and there has been a lot of disruption in the short-term. Markets have been closed for a couple of days, so that is very disruptive for share markets. And there will be a very negative effect in the short-term on things like consumer spending, industrial production, manufacturers - people haven’t been able to get to work - so there will be a short-term negative effect on the economy.
Having said that, in a month or two’s time, there will be the efforts to rebuild, to repair the damage that has been done by the hurricane, and that will boost GDP growth over that period.
Interviewer: How much does a disaster like this actually cost the economy?
John: The initial estimates of the impact of the hurricane is around 20 billion US dollars. Now that’s a lot of money, but it’s not nearly as big as the cost that was estimated for Hurricane Katrina, for example, which has been estimated to be over 100 billion dollars US.
Interviewer: When we think of markets, of course, we often think of New York, with Wall Street and the New York Stock Exchange. What has actually been the global impact of the stock exchange being closed for two days?
John: Yeah, well I mean it’s been very disruptive for the US markets. Remember there are exchanges all over the world; the European exchanges haven’t been affected and obviously the exchanges in our part of the world haven’t been affected. And there are some companies that are listed on multiple exchanges across the globe. But for those companies that are solely listed on the New York Stock Exchange – which is a large amount – it is a bit disruptive, particularly given that this is in the middle of earnings season, where corporates report their profit results for the quarter. So traders and investors do like to be able to trade on those results and that has affected that. Having said that, it is a bit of a temporary effect; things will return to normal with time.
Interviewer: There is a school of thought that natural disasters can actually be good for the economy of a country. Is that right?
John: I think that’s a misperception. All natural disasters have a similar effect, I think. You know, you get a big destruction of property, of wealth, and then there’s a big effort to rebuild that destruction, or repair that destruction. We’ve seen that with, for example, the Christchurch rebuild. You do get a bit of a boost as that repair/rebuild effort kicks in. But that diverts investment that would otherwise go into other productive areas, and probably more productive areas, so the net effect is likely to be negative in a longer term sense.
Article from Nathan Field, An Investor’s Guide to Natural Disasters (March 2011)