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Analysts say Harvey could temporarily Weigh on Economic Growth


Tropical storm Harvey isn’t donebattering the US, but analysts are already forecasting a temporary dent in economic growth through lower consumer spending and higher unemployment — although those losses could be reversed when recovery efforts take hold.

Goldman Sachs analysts estimated that 16.5 per cent of US refining capacity had been shuttered as a result of Harvey, and that energy-sector disruptions could knock as much as 0.2 percentage points off of GDP growth for the third quarter:

“(W)e stress that the overall impact of the hurricane on second-half growth is uncertain, as the negative effects are likely to be offset by an increase in business investment and construction activity once the storm has passed…Property losses will not be directly visible in most economic indicators, but major hurricanes in the past have been associated with a temporary slowdown in retail sales, construction spending, and industrial production, as well as a pickup in jobless claims.

However, GDP effects are ambiguous, as the level of economic activity typically returns to its previous trend—or even somewhat above—reflecting a boost from rebuilding efforts and a catch-up in economic activity displaced during the hurricane.”

Whether or not any Harvey-induced slowness prompts the Federal Reserve to reconsider its monetary policy course, ING analysts said that the mere perception could weigh on the already-weakened dollar:

“The knock-on effects suggest dampened 3Q17 US growth that may see the Fed deciding against raising interest rates again in 2017. While this may be too early to call, we do expect this thinking to weigh on the dollar in the near-term – especially as our economists believe that US activity data is unlikely to surprise to the upside, such that it could more than offset any external shock caused by the hurricane in Texas.”

Those same concerns and unknowns will also weigh on markets, which have pulled back this week over jitters stirred by Harvey, as well as the latest North Korea missile launch, said Craig Erlam, senior market analyst at OANDA:

“From a markets perspective, the uncertainty surrounding the cost and the economic implications of the storm is going to be a concern for investors, although it is difficult to look past the sheer devastation it has caused at the moment.”

Since Houston is the fourth-most populous US city, Harvey could temporarily hold back retail spending, before giving it a boost as the city rebuilds, UBS economists said in a report:

“The flooding will curtail spending by its residents in the short term, but we expect spending to rebound relatively quickly, as residents begin to replace flood damaged items, as insurance money flows into Houston, and as households make up for lost spending. We expect a modest drag in September spending followed by a modest spending boost throughout Q4. Sales at building material stores should see a substantial boost throughout as households rebuild.”

Analysts from Frost Investment Advisors see financial markets getting potentially bogged down while Harvey’s impact on myriad issues like employment, housing and economic activity are calculated — a process that can’t begin until the flood recedes:

“Ultimately there will be significant environmental issues and infrastructure damage spanning the gulf coast, coupled with temporary spikes in unemployment, business disruption, population dislocation, and a fragile distribution network which will be heavily stressed to bring food, healthcare, housing and some normalcy to those impacted by Harvey. How investors gauge these costs will likely weigh in on the financial markets over the next few days. Over the longer term, there is quite a bit of rebuilding now facing the gulf region.”

Capital Economics analysts saw the impact as being more muted, although possibly complicating efforts to resolve the showdown over the debt ceiling if funding recovery efforts becomes politically charged:

“We might see a small uptick in initial jobless claims in early September and a very modest adverse impact on employment, industrial production and retail sales that is quickly reversed in the following months. Harvey therefore does not change the outlook for monetary policy, although the emergency funding that Congress will need to find might complicate efforts to raise the debt ceiling.”




Financial Times. 

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