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Tue, Sep 06, 2005 - Page 12 News List

Economists say Katrina will damage growth

BIG INFLUENCE The shock of higher gasoline prices and concerns about supply have jolted the US economy and the effects of the hurricane will be felt globally, analysts say


The physical and psychological damage caused by Hurricane Katrina is likely to reverberate across the global economy in ways that will curb growth well into next year, economists say.

A spike in already-high energy costs in the US and around the world tops the list of risks, especially since oil prices are unlikely to return to the levels of early last year when they were 50 percent lower than they are today, according to International Monetary Fund managing director Rodrigo de Rato.

Katrina shut down large portions of oil and gas production in the Gulf of Mexico at a time when worldwide energy output was already stretched thin.

The shock of higher gasoline prices and concerns about supply shortages appeared to cause a cutback in travel over the Labor Day weekend in the US. Economists say a slump in consumer confidence is likely. "There's a psychological impact. Consumers aren't in a festive mood," said Mark Vitner, senior economist at Wachovia Securities in Charlotte, North Carolina.

The storm wiped away up to half a million jobs in New Orleans and other Gulf Coast areas. And its tab is almost certain to top US$100 billion, with only about a quarter of that covered by insurance, according to an assessment by Risk Management Solutions of Newark, California.

The full extent of the damage to oil and natural gas infrastructure in the Gulf of Mexico is not yet known, but it is expected to be weeks, if not longer, before output is back to normal. The same goes for the facilities that refine crude oil into gasoline, heating oil and jet fuel.

"It's quite likely that the impact of Katrina on energy production will end up dwarfing that of Ivan," said Antoine Halff, director of global energy at Eurasia Group in New York, referring to last year's Hurricane Ivan, which jolted global oil markets for months.

"We have an economy that has shown signs of slowing. With energy prices at extremely high levels -- and now moving above those levels -- this is kind of a double whammy," Halff said.

Unleaded gasoline now averages US$2.86 a gallon nationwide, an increase of about US$0.15 in less than a week, costing consumers an additional US$57 million a day.

In Katrina's aftermath, forecasts for US economic growth in the fourth quarter have dropped from 3.5 percent on an annualized basis to 2.5 percent. And that is probably what gross domestic product will average for all of next year, economists said.

The impact of higher energy prices is already hitting hard in Europe, where up to 60 percent of the retail price is made up of taxes.

The price of gasoline rose to the equivalent of US$6.70 a gallon in Germany and hit a record high in Switzerland. Spaniards were paying more than US$5 per gallon at the end of last week, up nearly 7 percent from a week earlier.

Surging oil prices have also already sparked an economic crisis in Indonesia. The nation's currency, the rupiah, fell to a four-year low against the US dollar as ballooning fuel subsidies to keep prices affordable for the masses are bleeding the government's coffers.

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