copyright © 2005 global insight, inc. the u.s. and global outlook: a post-katrina assessment...

Copyright © 2005 Global Insight, Inc.

The U.S. and Global Outlook: A Post-Katrina Assessment

Nariman BehraveshChief Economist

Toronto

September 13, 2005


The Impact of Hurricane Katrina

Copyright © 2005 Global Insight, Inc. 3 09/13/2005

Worst U.S. Storm Ever…

Deadliest storm before Katrina — 1900 hurricane that destroyed Galveston, Texas (6,000 to 8,000 dead)

Most costly storm before Katrina — Hurricane Andrew in 1992 (cost: approximately $26.5 billion)

The death toll from Katrina could rise as high as 10,000

The cost of the hurricane could easily exceed $100 billion

The damage to the national economic infrastructure is greater than any other storm


…With Large National Economic Impact

Most hurricanes and other natural disasters have a small impact on the national economy

Katrina’s impact will be considerably larger and could last longer for three reasons:

First, New Orleans, which is around 0.4% of the national economy, could be shut down for many months

Second, the port of New Orleans and South Louisiana (the largest in the nation) has sustained some damage, which could affect both import and export flows

Third, and most important, the vast energy infrastructure in the region has sustained some damage


…With Large National Economic Impact (cont.)

Big question: How soon will the energy infrastructure become fully operational?

Good news: The US and world economies had a lot of momentum going into this storm

Bad news: This is a supply shock on top of a demand shock, and inflation-adjusted oil and gasoline prices are close to all-time highs


Comparisons With 9/11

The human toll and economic costs of Katrina will be higher than 9/11

The economy is much stronger now than in late 2001…

…However, even 9/11 did not kill the embryonic recovery

Thanks to Y2K preparations in 2001, the backups for the financial infrastructure were in place — backups for the energy infrastructure in Louisiana have been quite limited

The policy response to Katrina will likely be muted compared with 9/11


Key Energy Observations and Issues

Worst of the impacts of the hurricane are past and conditions will gradually improve absent unexpected events

US production and refining capacity should return to 'manageable' levels within 30 days of the hurricaneNatural gas is the one possible exception if storage levels

going into the winter are very low

Prices are expected to erode slowly — consumers will be paying 37% more for a gallon of gasoline in December than a year ago, and home heating bills may be 30–40% higher

US production in the medium- to longer-term will be lower than expected before the hurricane

Has Hurricane Katrina become a catalyst to bring energy back to the center stage in the US and global markets?


Energy Supply Impacts of Hurricane Katrina

Impact on US Oil, Gas, and Refining

Day 1 Day 7 Day 14 Day 30 Day 60

Refining Capacity Volume mbd 1.7 1.1 0.6 0.3 0.2

Percent of US Capacity 10% 6% 4% 2% 1%

Crude Oil Volume mbd 1.4 0.87 0.7 0.5 0.3Production Percent of US Capacity 18% 11% 9% 7% 4%

Natural Gas Volume bcf/d 8.4 4.2 3.25 2 1Production Percent of US Capacity 17% 8% 6% 4% 2%


WTI: Price Range in $/Barrel

WTI ($/barrel)

High

Low

$40

$45

$50

$55

$60

$65

$70

$75

$80

$85

Jan-05 Apr-05 Jul-05 Oct-05


Henry Hub Index: Price Range in $/Million BTU

Henry Hub ($/Million Btu)

High

Low

$4

$6

$8

$10

$12

$14

$16

Jan-05 Apr-05 Jul-05 Oct-05


Hurricane Damage Estimates to the Economy

Sources: Insurance industry estimates; Commerce Department; Global Insight assumptions for Katrina

Private Insurance Costs

($ Billion) (% of GDP)

Florida Hurricanes (2004) 23.3 0.20

Katrina (2005) 35.0 (assumed) 0.28

National Accounts Basis Capital Destruction

($ Billion) (% of GDP)

Florida Hurricanes (2004) 29.5 0.25

Katrina (2005) 55.0 (assumed) 0.44

Total “Costs” from Katrina probably $100 billion-plus (0.8% of GDP)


Katrina Hurts Growth — Temporarily

0

1

2

3

4

5

2005Q1 2005Q2 2005Q3 2005Q4 2006Q1 2006Q2 2006Q3 2006Q4

August 2005 Forecast September 2005 Forecast

(Real GDP, percent change annual rate)


Inflation Spikes Briefly

0

1

2

3

4

5

2005Q1 2005Q2 2005Q3 2005Q4 2006Q1 2006Q2 2006Q3 2006Q4


(CPI, percent change from a year earlier)


Gasoline Prices Dampen Consumer Spending Growth

Every $0.10 on the price of gasoline is like a tax hike of 0.13% of disposable income.

0

1

2

3

4

5

05Q1 05Q2 05Q3 05Q4 06Q1 06Q2 06Q3 06Q4


(Consumer spending growth, percent change annual rate)


Employment Takes a Hit

-200

-150

-100

-50

0

50

2005Q3 2005Q4 2006Q1 2006Q2 2006Q3 2006Q4

Difference Between September and August Forecast

(Employment, thousands, average)


Fed May Pause — But Not For Long

2.0

2.5

3.0

3.5

4.0

4.5

5.0

2005Q1 2005Q2 2005Q3 2005Q4 2006Q1 2006Q2 2006Q3 2006Q4


(Federal funds rate)


Federal Budget Deficit Will Rise

250

275

300

325

350

2005 2006


(Billions of dollars, fiscal year)


Global Impacts

The major transmission mechanism of the Katrina shock to the rest of the world will be through higher oil prices and weaker US growth

Because of weak domestic demand, the Eurozone and Japan are more at risk from higher oil prices than the US

So far, the impact of higher oil prices in many emerging markets has been limited, thanks to fuel subsidies…

…However, the finances of many state-owned oil and energy companies are deteriorating and energy subsidies are likely to be lowered soon


Impact of Katrina on World Growth

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

2005 2006 2005 2006 2005 2006

Pre-Katrina Post Katrina

Source: Global Scenario Model

World Eurozone Japan


The Risks Are Predominantly on the Downside

Energy markets are still very tight and any further disruptions (Nigeria, Venezuela, Iraq, etc.) could push prices to new highs

Inflation could begin to rear its ugly head

There is a risk that both consumers and business could become much more cautious

Could this be the straw that breaks the back of some large companies in the transportation sector?

Could this be the event that deflates some regional housing bubbles?


How Big of a Threat is Housing?


House Prices Have Risen Sharply Relative to Wages…

(2000=100)

80

90

100

110

120

1972 1976 1980 1984 1988 1992 1996 2000 2004

Existing Home Prices/Hourly Labor Compensation


…Though Low Interest Rates Mean That Homes Are Still “Affordable”

A higher index means homes are more affordable

0.6

0.8

1.0

1.2

1.4

1.6

1972 1975 1978 1981 1984 1987 1990 1993 1996 1999 2002 2005

Affordability Index for Existing Single-Family Home


Housing Affordability Is Becoming a Problem In Some Regions

A higher index means homes are more affordable

0.6

0.8

1.0

1.2

1.4

1.6

1.8

2.0

1989 1991 1993 1995 1997 1999 2001 2003 2005

West North East South Mid West


House Price Inflation

-75 0 75 150 225

Hong KongJapan

GermanySwitzerland

CanadaDenmark

New ZealandBelgium

United StatesItaly

NetherlandsSwedenFrance

AustraliaSpain BritainIreland

South Africa

(Percent increase 1997-2004)

Source: The Economist


Other than Asia, There is Little Growth in the Rest of the World


-2

0

2

4

6

8

NAFTA OtherAmericas

WesternEurope

EmergingEurope

Japan OtherAsia

MiddleEast

Africa

2003 2004 2005 2006 2007

(Percent change, real GDP)

Growth Remains Very Uneven Across the World


Eurozone – Domestic Demand is Very Weak

Below average performance in 2004 and early 2005

The main culprit is weak domestic demand – both consumer expenditures and business fixed investment have been flat to down recently

The recent political turmoil has hurt (already depressed) consumer and business confidence

The ECB could cut rates next year – but will it be too little and too late?

Despite all the fuss over the demise of the Stability and Growth Pact, fiscal policy (adjusted for the business cycle) has actually become tighter over the past few years


-1

0

1

2

3

4

France Germany Italy Spain UnitedKingdom

Sweden

2003 2004 2005 2006 2007

(Percent change)

Output Gaps Are Growing in Much of the Eurozone


(Dollars per euro)

The Euro Will Appreciate Further

0.4

0.6

0.8

1.0

1.2

1.4

1.6

1999 2000 2001 2002 2003 2004 2005 2006


Japan – Low Underlying Growth

Underlying growth is around 1.5%

While Japan’s financial sector is healthier and corporate profits are strong, progress has been very slow

There is a dichotomy between large, profitable multinational firms and struggling small-and medium-sized firms, especially in the service and construction sectors

The yen will continue to appreciate

Deflation will end in 2006 – maybe

Japan’s population will peak in 2007, then gradually decline


Japan’s Economy Is Back to Trend Growth

(Percent change, real GDP)

-2

0

2

4

6

8

1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008


(Yen per U.S. dollar)

The Dollar Will Keep Depreciating Against the Yen

50

70

90

110

130

150

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007


Asia – Slowing But Still Robust Growth

China’s high-powered growth will gradually cool as the government curbs excessive state investment

The Chinese economy is not overheating – this means that the revaluation of the exchange rate is likely to be modest (no more than 5% a year)

India is rapidly developing its computer software, biotech, and business and financial services industries

South Korea is slow to recover from a consumer credit bubble – exports, the engine of growth, are now decelerating

Hong Kong, Singapore, Taiwan, and Indonesia are seeing an acceleration in business investment

Australia’s expansion will moderate in response to rising debt, a housing price bubble, and higher interest rates


Real GDP Growth in Asian Economies

(Percent change)

0

2

4

6

8

10

China Hong Kong Taiwan India Australia

2003 2004 2005 2006 2007


(Percent change)

Real GDP Growth in Asian Economies (Continued)

0

2

4

6

8

10

Indonesia S. Korea Malaysia Philippines Singapore Thailand

2003 2004 2005 2006 2007


The U.S. Dollar Will Weaken Further


The Dollar is Headed Down in the Medium- to Long-Run

The U.S. current account deficit is not on a sustainable path

How much of this is due to internal U.S. imbalances versus weak domestic demand growth elsewhere (and higher U.S. import elasticities)?

In order to stabilize the external debt ratio of the U.S., the current account deficit needs to be reduced to around 2% or 3% of GDP (from its current level of over 6%)

A reduction in the U.S. budget deficit will only put a small dent in the U.S. current account deficit – stronger domestic demand growth in the rest of the world and a bigger depreciation in the dollar are also needed

If the correction in the U.S. current account deficit is via the dollar, the risk to the U.S. and the rest of world may be considerably smaller than is commonly feared


U.S. Current Account Deficit: $800 Billion as Far as the Eye Can See?

(Billions of dollars) (Percent of GDP)

-1,000

-800

-600

-400

-200

0

200

1970 1974 1978 1982 1986 1990 1994 1998 2002 2006 2010

-7.5

-6.0

-4.5

-3.0

-1.5

0.0

1.5

Current Account Deficit Deficit as % of GDP


Net Foreign Debt

Norway (1977)U.S.

(1894) U.S. (2003)

Mexico (1980)

Argentina (1980)

Brazil (1980)

U.S. (2007)

New Zealand (1999)

Ireland (1983)Australia (1996)

Finland (1994)Sweden (1994)

Canada (1980)

0

20

40

60

80

100

1999 2004 2009 2014 2019 2024 2029 2034

(Percent of GDP)

Source: IMF; Obstfeld & Rogoff


(U.S. dollar foreign exchange value, FRB broad index, March 1973=100)

The Exchange Rate Has Not Yet Fallen as Far as in the 1980s

80

90

100

110

120

130

1973 1976 1979 1982 1985 1988 1991 1994 1997 2000 2003


The World’s Growth Imbalance

-1

0

1

2

3

4

5

2001 2002 2003 2004 2001 2002 2003 2004 2001 2002 2003 2004

Real GDP Growth Net Export Contribution Potential GDP Growth

(Percent)

United States Germany Japan


Bottom Line

Katrina is most likely the worst storm ever to hit the US…

…With a larger than usual economic impact because of damage to trade and energy infrastructure

Provided the energy infrastructure is fully operational soon and energy markets return to “normal”, oil and gasoline prices should continue to slide between now and the end of the year — but most of the risks are on the upside

Given the strong momentum of growth since the spring, the impact on real GDP growth will be modest…

…However, the vulnerability to another shock has increased

Housing, weak growth in the rest of the world, and a dollar crash could all adversely affect the outlook for the next couple of years

copyright © 2005 global insight, inc. the u.s. and global outlook: a post-katrina assessment...

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