The costs of Hurricane Katrina in terms of lives and infrastructure appear to be immense. Yet, for all that, we may be months away from being able to make serious calculations of the economic fallout, and the possible implications for Canadian exporting companies.
The U.S. economy overall will operate below previously anticipated levels for at least a few months. Rebuilding efforts are then likely to begin in earnest, although the recovery of lost activity could stretch out well beyond 2006.
Economists have converged around a near-term impact on U.S. economic growth of about 0.5 percent of GDP. It could be even less than this, if government spending goes up a lot. That may sound trivial, but Canadian exporting companies will still feel both direct and indirect impacts.
Consider first that the three affected states — Louisiana, Alabama and Mississippi — account for about $3.6 billion in Canadian exports annually. Lumber, wood products, rubber products, auto parts, paper, office furniture, plastics and chemicals are the leading categories. Assuming this trade is disrupted until year-end, there could be more than $1 billion in lost export sales in 2005.
Consider as well that Katrina has put additional upward pressure on oil prices. Even though the oil market has returned to pre-Katrina prices, continued uncertainty about oil and gas production implies that there is a lasting Katrina premium in the market. In other words, oil prices would probably be even lower today had Katrina not occurred. This price effect is contributing to the negative impact on U.S. GDP, and probably accounts for up to two cents of upward pressure on the Canadian dollar. This, too, could shave another billion dollars in Canadian export sales.
Running these various effects through our trade models indicates that Canadian companies could forego as much as $2-3 billion in export sales in the near term, even though energy exports will be higher. The negative effects are likely to be the greatest in consumer goods and cars, as American consumers spend more on energy and less on other things. But Canada’s machinery and equipment sector might also feel the pinch as U.S. companies delay investment plans.
What about next year? Of course, rebuilding efforts and a gradual return to normal can be expected to reverse those effects, perhaps even more so. Exports of building materials, oil and gas equipment and engineering services are likely to lead the way. Even so, it is likely that the return to normal will be spread out well beyond 2006. Moreover, financial markets might then find reason to renew their preoccupation with the U.S. fiscal deficit which, although much lower today than the doomsayers advertised last year, could balloon in the wake of post-Katrina spending.
The bottom line? It is too early to do concrete calculations, but it is evident that Katrina will have far-reaching economic effects. Canadian companies will see a negative impact, on balance, in the near term, but 2006 should see a period of faster U.S.-bound export growth.
September 15, 2005
The views expressed here are those of the author, and not necessarily of Export Development Canada.