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Disaster economics

| Posted by: Paul Donovan | Tags: Paul Donovan Weekly

  • Natural disasters create a great deal of human suffering. A growing global population and climate change place more of the world's population at risk than in the past. Although far less important than the human cost, the material costs of natural disasters are increasing as a consequence.
  • Financial markets focus on the change rather than the level of human wellbeing. A natural disaster lowers living standards (a level) but raises gross domestic product (a change). The loss of infrastructure and possessions lowers living standards. GDP will rise as the damage is repaired, generating economic activity. Rising GDP does not guarantee living standards return to pre-disaster levels.
  • Recent disasters will reduce short-term GDP. The disruption of a disaster will reduce consumption. Supply chains will be disrupted. Casual jobs will be lost. Weather-sensitive jobs like construction will be lost outside the immediate disaster area. 
  • Within a relatively short space of time, a cycle of repair and replace will raise GDP. Public infrastructure may take time to be rebuilt. Governments agreeing on funding do not mean that the money is spent at once. Repairing private homes, buying new consumer goods and replacing damaged cars happen more rapidly. This will create jobs over time.