The Financial Impact of Natural Disasters on the Economy

Hello World!  Welcome Friends!  Last year’s catastrophic flooding in Louisiana and this year’s hurricanes in Texas and Florida have once again drawn the public attention to natural disasters in the country. And while people’s lives are a primary concern during the disaster, there are other things we have to think about now.

Moreover, according to IPCC research, experts are predicting that both the intensity and frequency of these cataclysmic events will rise as a result of climate changes. Therefore, thinking about the potential economic effects of these natural disasters is becoming increasingly important…

Image Credit: Richard Carson / Reuters

The Costs of Irma and Harvey

As Fortune Magazine reports, according to estimations from Moody’s Analytics, damages and lost productivity caused by recent hurricanes Irma and Harvey may end up costing anywhere between 150 and 200 billion dollars. But how fast will Houston, Miami and other cities in the area recover?

The good news is, the experts tend to agree that the recovery will be relatively quick. For instance, according to Moody’s Mark Zandi, roughly 80% of the economy will recover in 6 months, 90% in a year or so and by 2020, the economy will be at 100% once again.

The Impact on Global Economy

Although small-scale natural disasters are mostly local in their impact, the bigger ones can actually have fairly big impact on the planet as a whole. For example, the 1815 eruption of Tampora prompted so much sulfur in the atmosphere that the temperature on earth dropped by 1 degree Celsius.

And while that eruption occurred more than two centuries ago at this point, we even have a more recent example of a natural disaster affecting the whole planet. Back in 2011, the infamous earthquake in Japan managed to shit the planet’s axis, shortening the length of the day in the process.

So, once again, what about the economy? Can these disasters have a greater effect on the global economy? In short, the answer is yes, the economic impact can be just as deep. The Atlantic hurricane season twelve years ago saw staggering 28 storms, which caused a major economic loss.

That year, we saw Hurricane Katrina, the single largest – and the most expensive by far – hurricane in the history by insured and economic losses. In the end, the hurricane season as a whole caused economic losses of almost 210 billion dollars, according to stats from Weather.com.

The Impact on Local Economies

Now, the first thing we need to recognize is that we’re living in a truly global economy. And it’s safe to say that every time it faces a natural disaster of big proportions, we are reminded of our global economy. For instance, between 1995 and 2015, hundreds of storms, floods and heat waves have left more than 600,000 people dead and cause around 2 trillion in economic losses, as Time Magazine reports.

What’s more, according to a recent Global Climate Catastrophe Report, more than 70% of global losses come from weather disasters like hailstorms in Europe, hurricanes in the US and Mexico, floods in India, UK and Pakistan among others.

All of these numbers sound large, but don’t forget, these statistics only cover larger disasters – the figures in most studies don’t actually cover small storms, floods or other local disaster that can cause even more economic loss and disruption. As the recent US Department of Commerce report states, even these small-scale disasters can wipe out a large number of local businesses and decimate local economies.

For example, disasters like floods and earthquakes can easily disrupt both the private and the commercial real estate market for a certain period of time. On the other hand, we cannot truly know the impact of disasters, because some experts claim that the small real estate markets in high-risk disaster areas have recovered much faster from the housing crisis than low-risk areas.

Wider Implications

But large disasters have a potential to affect the economy far beyond the small local damages. This is because small businesses across the world can find their markets and supply chains disrupted in the aftermath of these disasters. Again, this happens because most small businesses today rely on services or even goods from other parts of the world to some extent.

We have the perfect two recent examples in the Thailand Floods and Tohoku Tsunami. On the surface, both disasters seemed localized for the most part, but had wider economic implications. Due to the nature of economies of both countries – both function as large manufacturers of goods for a number of different industries – these disasters disrupted the global supply chain.

As The Guardian reports, the Thai floods hit the PC hard drive suppliers from all across the world. Faced with such a shortage of hard drives, prices skyrocketed in most countries and the situation remained the same until factories got back online a few months later.

And as CBS reports, when it comes to the Tsunami, a number of US and European car manufacturers – including Ford and General Motors –  were forced to shut their productions down because of the lack of car parts from factories in Japan. As you can see, the impact of these disasters can be potentially broad, and since these incidents ensuring that a business is prepared for chain supply disruptions has become increasingly important.

Final Thoughts

In the end, we’ll probably never know the true costs of a natural disaster. And it’s pretty hard to see the extent of the economic consequences larger natural disasters can bring about. The worst thing about it – it seems like we can’t do much about it.

Nonetheless, no matter how little we can do to avoid these types of situations, we can certainly prepare for it, in both the physical and the financial way. And understanding the economic implications of natural disasters is the first step all of us have to take.

Click the links below for any posts you may have missed!

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