Accessibility links

Breaking News

Economic Impact of Katrina Could be Worldwide, Long-Lasting

Higher oil prices are not the only consequence of what many say is one of the worst natural disasters in U.S. history. Some economists say the impact of Hurricane Katrina is going to be felt far beyond America's shores.

It may be one of the most expensive storms in U.S. history, with insurance claims alone, expected to top 25 billion dollars. Along the U.S. Gulf Coast, Hurricane Katrina destroyed homes, buildings and jobs. It shut down oil refineries and shipments and sent the price of gasoline soaring from Los Angeles to New York.

And New York cabbies are not the only ones feeling the economic impact of Katrina. Some economists say consumers from Asia to Europe can expect to pay more for everything from gasoline to airline tickets.

Peter Morici, an economics professor from the University of Maryland, says that's because the U.S. economy, which accounts for 20 percent of the world's Gross Domestic Product is so large that disruptions to its vital supplies are likely to be felt elsewhere.

"So as the price of gasoline goes up in New England, it goes up in Great Britain as well as Germany and other places around the world," said the professor.

The impact of higher energy prices is already being felt in Europe, where up to 60 percent of the retail price of gasoline is taxes. In Britain and Germany, for example, the price for a liter of gasoline is now approaching two dollars.

In the transportation sector, the airline industry estimates losses of a billion dollars every year for every one-cent increase in the price of jet fuel. Many airlines, already struggling to avoid financial disaster have started passing the added costs to passengers, a trend that's also happening in other industries. Economists say rising prices for goods and services could act as a damper on the global economy and deepen the anticipated economic slowdown in the United States.

Professor Morici explained. "That will have an important and significant impact on the demand in the United States for goods from China that are consumed. For example, in the Wal-Marts, things like t-shirts and furniture and inexpensive electronics. It's also going to affect American demand for BMW's and Mercedes Benz's, French wines, English products, what have you."

The loss of an estimated 400,000 jobs in the Gulf Coast states could further erode consumer confidence resulting in American consumers buying fewer luxury goods. But Barry Wood, a senior economics reporter at the Voice of America, says the downturn may prove to be temporary.

"If you jump ahead a couple of months, all those job losses are going to translate into job gains because of all the money that's being spent on rebuilding and disaster relief,” said Mr. Wood.

For now, the immediate forecast calls for a spike in prices on most products that used to flow through the Port of New Orleans. That includes higher prices for industrial commodities like oil, steel, and lumber. Consumers can also expect to pay more for coffee, paper products, and produce.

Barry Wood says the real concern is not how high prices will go, but how long they will stay there. "If those prices go up and consumer spending is impacted, not just by higher gasoline prices but by general price rises across the board, then the Central Bank is in a tough spot because on the one hand they've got to battle an economic slowdown and on the other prevent a surge in inflation."

A slowdown could result in reduced interest rates while increased inflation could cause rates to rise. A federal decision will be made later. But for now, the federal government has committed $62.3 billion for the devastated region. Mr. Wood says that means the U.S. budget deficit picture, now estimated at $300 billion, will grow in 2006.