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Home >> Business
UPDATED: 10:21, September 05, 2005
Katrina may curb economic growth into 2006
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The physical and psychological damage caused by Hurricane Katrina is likely to reverberate across the global economy in ways that will curb growth well into 2006, economists say.

A spike in already-high energy costs in the United States and around the world tops the list of risks, especially since oil prices are unlikely to return to the levels of early 2004 when they were 50 percent lower than they are today, according to International Monetary Fund Managing Director Rodrigo de Rato.

Katrina shut down large portions of oil and gas production in the Gulf of Mexico at a time when worldwide energy output was already stretched thin. While the storm's impact was most acute in the United States, it also sent fuel costs higher around the globe, squeezing consumers in Europe and Asia and hurting everyone from truckers to fishermen to airlines.

The shock of higher gasoline prices and concerns about supply shortages appeared to cause a cutback in travel over the Labor Day weekend in the United States. Economists say a slump in consumer confidence is likely. "There's a psychological impact. Consumers aren't in a festive mood," said Mark Vitner, senior economist at Wachovia Securities in Charlotte, N.C.

The storm wiped away up to half a million jobs in New Orleans and other Gulf Coast areas. And its tab is almost certain to top $100 billion, with only about a quarter of that covered by insurance, according to an assessment by Risk Management Solutions of Newark, Calif.

The federal government has pledged billions of dollars of rebuilding funds, but it will take months for the basic recovery efforts to be completed before the money for reconstruction starts flowing. "This is such a different type of disaster than we're accustomed to dealing with," Vitner said.

The full extent of the damage to oil and natural gas infrastructure in the Gulf of Mexico is not yet known, but it is expected to be weeks, if not longer, before output is back to normal. The same goes for the facilities that refine crude oil into gasoline, heating oil and jet fuel.

"It's quite likely that the impact of Katrina on energy production will end up dwarfing that of Ivan," said Antoine Halff, director of global energy at Eurasia Group in New York, referring to last year's Hurricane Ivan, which jolted global oil markets for months.

"We have an economy that has shown signs of slowing. With energy prices at extremely high levels -- and now moving above those levels -- this is kind of a double whammy," Halff said.

Unleaded gasoline now averages $2.86 a gallon nationwide, an increase of about 15 cents in less than a week, costing consumers an additional $57 million a day. That is still below the inflation-adjusted high of $3.11 a gallon reached 25 years ago, but it is getting close enough to become a significant threat to consumer spending in other areas, and not just in the United States.

In Katrina's aftermath, forecasts for U.S. economic growth in the fourth quarter have dropped from 3.5 percent on an annualized basis to 2.5 percent. And that is probably what gross domestic product will average for all of 2006, economists said.

Some local economies will no doubt benefit from the fact that New Orleans will be out of commission for months. Tourists who might have visited the Big Easy will go elsewhere, corporate conferences will be relocated and cities throughout the South will witness a tightening of their rental housing markets as evacuees from New Orleans reestablish their lives elsewhere.

But when winter arrives and the higher cost of home-heating strikes the Northeast and Midwest, consumer spending, particularly among lower income families, is expected to take a noticeable hit.

Michael P. Niemira, chief economist at the International Council of Shopping Centers, said the U.S. retail sector will face its toughest Christmas since the Sept. 11, 2001 terror attacks.

The impact of higher energy prices is already hitting hard in Europe, where up to 60 percent of the retail price is made up of taxes.

The price of gasoline rose to the equivalent of $6.70 a gallon in Germany and hit a record high in Switzerland. Spaniards were paying more than $5 per gallon at the end of last week, up nearly 7 percent from a week earlier.

Eurasia Group's Halff noted that the impact soaring energy prices will have on household budgets will be even more significant in emerging economies around the globe as governments begin to roll back costly fuel subsidies.

Surging oil prices have already sparked an economic crisis in Indonesia. The nation's currency, the rupiah, fell to a four-year low against the U.S. dollar as ballooning fuel subsidies to keep prices affordable for the masses are bleeding the government's coffers.

Seeking to avoid a meltdown, the central bank hiked interest rates and Indonesian President Susilo Bambang Yudhoyono told the nation on a televised address that he would have to cut subsidies at some point -- in effect raising gasoline prices for consumers.

With the Chinese economy growing at a rate of 9.5 percent, no one is forecasting a dramatic slowdown there, but the impact from higher energy prices has already been felt in shrinking profit margins, regional shortages of gasoline and diesel, auto purchases and international travel, among other areas.

To offset higher oil prices in Thailand, the government has introduced an economic stimulus package and an array of energy-saving measures, including mandating that billboards can be illuminated for only three hours a day and requiring gas stations to close at night.

Thai fisherman have also felt the pinch. In recent months, more than 5,000 fishing boats, accounting for almost one-third of total fishing boats in southern Thailand, have gradually stopped operating as fuel costs ate up their profits, according to Prasant Silphiphat, president of the Fishermen's Association of Thailand.

Andy Xie, an economist at Morgan Stanley in Hong Kong says that economic growth rates across Asia are down by a third to a half of last year, thanks mostly to higher oil costs. "Growth rates could decelerate by another 1 percentage point due to further rises in oil prices," he wrote in a recent report.

Source: China Daily/AP

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