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Katrina
Hurricane damages exceed costliest storm to date
While
rescue efforts related to the 29 August Katrina Hurricane are still
underway, a clearer image of the economic impact of the disaster is
emerging. According to historical evidence from similar disasters in the
past, the impact of a storm of this magnitude is typically only of
temporary nature as reconstruction efforts compensate for output loss in
the wake of destruction. However, the damage caused by Katrina even
exceeded the costliest storm to date, Hurricane Andrew in 1992. Initial
estimates put the cost of replacing insured property and goods in the area
as high as US$ 26 billion compared to US$ 22 billion of damage incurred by
Andrew and not too far from the US$ 32 billion of insured losses related
to the 11 September 2001 attacks. Moreover, total damage from Katrina,
including uninsured items, could reach US$ 40 billion. According to
estimates from the Congressional Budget Office (CBO) from 7 September, the
cost of relief operations may rise to as much as US$ 200 billion.
However, regardless of what the total bill will be, the is sure to be
insignificant compared to total output of the U.S. economy – in 2004 gross
domestic product amounted US$ 11.7 trillion. Even when considering output
disruptions in the three most affected states -- Louisiana, Mississippi
and Alabama – the direct impact on the national economy is limited since
the three states account for less that 3% of total U.S. output.
Damages to
oil sector send oil prices soaring to new highs
However,
the economic ramifications of the catastrophe are more far-reaching than
the direct property damages and the concomitant output losses. The region
hit by the storm is at an important centre of the U.S. energy sector, a
neural point of the entire economy. Not only did Katrina batter oil and
gas production platforms in the Gulf of Mexico but it also forced several
Louisiana and Mississippi refineries to close and the loss of electric
power in the region affected several major pipelines that deliver oil to
other parts in the country. As a result, gasoline inventories levels that
were already at a low prior to 29 August have dropped further. Markets
reacted promptly. On 10 August, the price for West Texas Intermediate (WTI)
reached a record high of US$ 70.85 a barrel, as concerns about protracted
oil supply shortages raised concerns in the markets. However, those
concerns faded quickly as several countries released part of their
strategic oil reserves. On 2 September. the International Energy Agency (IEA)
announced that its 26 industrialized member countries would release 2
million barrels per day (bpd) of oil for 30 days to compensate for the
loss of U.S. crude and refining output. As a result, the WTI oil price
dropped back to pre-Katrina levels at US$ 64.08 a barrel on 9 September.
Nevertheless, the Energy Information Administration (EIA) estimates that
900,000 barrels per day (bpd) of domestic crude oil refining capacity may
still be offline at the end of September due to storm damage. Therefore,
with refineries not yet back to full capacity, gasoline price are likely
to remain high. According to EIA information from 6 September, the
average U.S. weekly retail gasoline price soared to a record US$ 3.069
cents per gallon, up 45.9 cents from the week before. The high gasoline
price puts another drain on the already-stretched budgets of increasingly
indebted households, which are a key determining factor for overall health
of the U.S. economy. In an estimate from 7 September, the CBO claimed
that evidence to date suggests that overall economic effects will be
“significant but not overwhelming”. The CBO expects that the devastation
in the Gulf Coast region will reduce job growth through the end of the
year by about 400,000 and could slow the economy's expansion in 2005 by
between 0.5 and 1.0 percentage point at an annual rate in the second half
of the year.
Economists are still gauging the impact of Katrina on the U.S.
economy. So far, Consensus Forecast have lowered their outlook for the
full-year growth this year only by one tenth of a percentage point from
3.7% expect last month to the current 3.6%. However, further downward
revisions to the growth outlook are possible once the effect of
disruptions in the oil industry and the impact of higher gasoline prices
on consumption become more palpable.
U.S.
economy continued to grow at robust pace prior to Katrina Hurricane
Even
though the government revised second quarter growth downward, the economy
was robust prior to the storm. According to preliminary estimates
released by the Bureau of Economic Analysis from 31 August, the economy
expanded by 3.3% in the second quarter, which was down one tenth of a
percentage point from the advance estimates released one month earlier.
While second quarter growth was thus considerably slower than the 3.8%
pace registered in the first quarter, the slowdown mostly reflected
companies drawing down inventories at a greater scale, which sliced 1.99%
of the second quarter expansion. Without the negative impact of the
inventories, gross domestic product (GDP) would have grown by 5.3% and
with private consumption remaining strong, inventories will have to be
replenished eventually, suggesting stronger growth in the second half of
the year.
Current
account deficit will remain cause of concern but fiscal deficit is
improving markedly
With
private consumption likely to continue to fuel economic growth in the
remainder of the year in spite of the damages resulting from the storm,
the current account deficit remains the key concern. In the first
quarter, the current account deficit had reached US$ 195.1 billion or 6.4%
of GDP. And with the U.S. consumer’s unrelenting appetite, the current
account is unlikely to drop notably throughout this year. In fact,
Consensus Forecast panellists anticipate the current account deficit to
reach 6.1% of GDP, even exceeding last year’s 5.7% of GDP deficit.
However, while the current account deficit remains a major point of
concern, the clouds over the fiscal deficit are breaking up. On the back
of the fairly robust economic growth in the first half of the year, the
tax take increased by US$ 210 billion in the first five months of the year
compared to the same period last year. Tax revenues thus exceeded
official estimates made earlier this year and as a result both the CBO and
the White House’s Office and Management and Budget (OMB) have revised
their deficit projections for this year downward. On 15 August, the CBO
reduced the previous January forecast of a fiscal deficit of US$ 400
billion to US$ 331 billion and in July, the OMB cut its February
projection of US$ 427 billion to US$ 333 billion, which represents
approximately 2.7% of GDP. However, these numbers are pre-Katrina and the
damages inflicted by the storm will widen the hole in the federal budget
further and will thus jeopardize the government’s agenda for cutting taxes
and reducing the deficit. Consensus Forecast panellists are somewhat less
optimistic than the government and the legislature and expect the fiscal
deficit to reach 3.1% of GDP this year.
Koizumi
wins landslide victory
On 11
September, Prime Minister Junichiro Koizumi won a landslide victory with
296 seats in the 480-member lower house of parliament. Following the
rejection of the postal privatisation bill in the upper house on 8 August,
Koizumi had called for re-election of the lower house two years ahead of
schedule. The upper house rejected Koizumi's proposal to privatise the
Japanese postal system after rebellious members of his own ruling Liberal
Democratic Party (LDP) joined the opposition to vote against the reform
bill in a 125 to 108 vote against the government. With some 400,000
workers, the Japanese postal system is the nation's largest employer.
Moreover, in addition to delivering mail, Japan Post (JP) is the main
savings and insurance institution of the country. As the world’s largest
savings bank, the financial branch of JP administers 350 trillion yen
(US$ 3.1 trillion) in assets. The funds of JP have traditionally served
to finance public works projects, especially in rural areas and have
helped secure support for the LDP, which has governed the country for all
but 10 months since 1955. Koizumi wanted to sever the ties between the
LDP and government on the one hand and JP on the other hand. However,
opponents within the LDP claimed that the sale would have resulted in post
office closures and job losses. The opposition against postal reform bill
within the LDP highlights a political rift that is blocking Koizumi's
plans to trim government spending and curb the expansion of the
exuberating public debt.
Overwhelming majority provides Koizumi with strong mandate to continue
economic reforms
Ever since
assuming power in 2001, President Koizumi had made the reform of the
postal service a centrepiece of his political agenda. The defeat of the
JP bill by dissidents within the LDP did not come as a surprise and
Koizumi had threatened to call for early elections if the bill was
defeated prior to the vote. Last month, the more powerful lower house of
Parliament, which chooses the prime minister, approved the postal plan by
a mere five votes, as 37 lower-house LDP party members voted against the
bill. Since Koizumi had expelled the LDP dissenters who opposed post
office reform, the 296 seats grants him a sound majority fin the lower
house to push through his reform plans. Moreover, LDP’s coalition
partner, the New Komeito party, garnered 31 seats, giving the ruling
coalition more than 320 seats that represent a two-thirds majority. By
securing two-thirds in the lower chamber, the coalition can push bills
through parliament despite opposition in the upper house, where the
coalition has only a slim majority. With no opposition to stop him,
Koizumi is likely not only to push through the postal reform bill but also
embark on more far-reaching economic reform projects before handing over
power to his successor in September 2006.
Re-elections in Germany likely to pave the way for economic reform
Not even a
week after the Japanese elections, Germany, the world’s third largest
economy, will follow suit with early elections on 18 September. On 25
August, the Supreme Court removed remaining doubts on the
constitutionality of President’s Horst Köhler’s decision to dissolve the
lower house in July and call for national elections
one
year ahead of schedule. As in Japan, the decision to call for early
elections was motivated by a stalemate on reforms. While the governing
coalition of Chancellor
Gerhard
Schröder commands a majority in the lower house, it lacks a majority in
the upper chamber, which represents the regions. By constitution, the
approval of the upper chamber is required on the most important
legislative measures since those bills tend to affect the regions in one
way or another.
In May,
the ruling social democratic party (SPD, Sozialdemokratische Partei
Deutschlands) lost the regional elections in the country’s industrial
centre, rendering approval in the upper house of pending reforms even more
difficult. Faced with the stalemate to implement much-needed economic
reforms to revive the ailing economy, chancellor Gerhard Schröder called
for early elections of the lower house. However, whatever the outcome of
the elections in the lower house, the composition of the upper house will
not change. It is therefore not surprising that polls indicate a victory
of the conservative (CDU, Christlich Demokratische Union Deutschlands)
and liberal elements (FDP, Freie Demokratische Partei). If
elected, the governing coalition of conservative and liberals would
command a comfortable majority in the upper chamber paving the way for the
revival of the long-stalled economic reform process.
Better
outlook for China, India and Japan lift outlook for Asia
Growth
prospects for Asia continue to improve. Following on last month’s 0.1
percentage point upgrade to this year’s economic growth forecast for the
entire Asian region including Japan, Consensus Forecast panellists beefed
up the outlook another tenth of a percentage point this month to 4.1%.
The regional average growth forecast for 2005 increased even though oil
prices continued to climb to a new record high in the past month. This
month, upward revisions to economic growth for the region’s most important
economies, China, India and Japan were the key drivers to the improved
outlook. In particular, Increasing optimism about economic recovery in
Japan accounted for the lion share of this month’s upgrade. With Japan
accounting for more than half of Asian output
weighted in US$ terms, the 0.2 percentage point upward revision applied
had a huge impact on the regional average. However, the forecast for
output growth in the regional economy excluding Japan also inched upwards
by one tenth of a percentage point from 6.4% expected last month to the
current 6.5%, as upward revisions to China, Hong Kong, India, Indonesia
and Singapore more than compensated for the downgrades to Taiwan and
Thailand. China experienced the fourth consecutive upgrade, as attempts
of the Chinese government to cool the economy prove less effective than
anticipated. As a result, Consensus Forecast participants expect economic
growth to reach 8.9% this year, which is up a 0.1 percentage point from
last month’s estimate. Consensus Forecast panelists also lifted the
outlook for the other regional behemoth, India, from 7.0% expected last
month to 7.1% this month, as strong growth in the manufacturing industry
is spilling over to other sectors of the economy.
Growth
outlook for Latin America revised upward in spite of
The
outlook for Latin America also improved over the past month. Since the
3.9% expansion projected in August, Consensus Forecast panellists revised
the growth forecast for Latin America upward by 0.1 percentage points to
4.0%. Thus, the Latin American region will experience yet another year of
above average growth, following on last year’s stellar 5.9% expansion. In
fact, apart from last year, this year’s expansion would represent the
highest rate since 1994 together with the same growth rate in 2000. This
month, an improved growth forecast for five of the seven major economies
lifted the regional outlook. Only Mexico was revised downward over last
month and Colombia is seen unchanged. The downward revision in Mexico was
mainly motivated by worse than expected developments in the second
quarter. In addition, with almost 90% of all exports directed to the
United States, Mexico is the most likely Latin American economy to suffer
from potentially slower growth in the United States in the wake of the
Katrina Hurricane.
Venezuela
profits from strong oil prices
Venezuela
experienced the strongest upward revision to the 2005 GDP forecast, which
improved from 6.0% expected last month to 6.2% this month, as the country
is profiting from increasing oil prices. The price for West Texas
Intermediate even briefly exceeded the US$ 70 threshold and while price
receded meanwhile, most observers expect the oil price to remain high amid
continued constrained supply situation exacerbated by the Katrina
Hurricane. The resulting boost to government income from rising oil
prices is helping government spending, the driver behind the current
strength in the economy. The government efforts also appear to be
spilling over to activity in the private sector.
… Brazil
outlook boosted as high interest rates are less suffocating than expected
Consensus
Forecast panellists again lifted the growth forecast for Brazil by 0.1
percentage points over last month to 3.2%. The upward revision ended a
string of four consecutive downgrades in the wake of tight monetary
policy, which threatened to suffocate the economy. However, the economy
proved more robust than expected in the second quarter, prompting an
upward revision to the full-year forecast. Furthermore, the political
scandal that had been undermining investor confidence is unlikely to spill
over to the economy.
Chile and
Peru benefit from strong commodity prices
Growth
prospects for both Chile and Peru also improved over last month. Both
countries benefit from a less pronounced slowdown of the external sector,
in the wake of a less dynamic global demand, and continued strong
commodity prices.
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