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Calm after the storm

Sandy is unlikely to impact insurance rates and oil prices across the world.

india Updated: Nov 01, 2012 23:54 IST

The estimated $30-50 billion loss from Sandy, the storm that lashed the US Atlantic coast this week, could shave off some growth immediately but the world’s largest economy — at $13.6 trillion — will more or less offset it by rebuilding damaged infrastructure and businesses. A Bloomberg survey of 25 economists found the storm would cut 0.15 percentage point from growth in the fourth quarter of this year, according to the median forecast. In the first quarter of next year, it would add 0.1 point to growth. The disruption in US financial markets, transport and government services are nowhere close to the 7.9% shrinkage in the Japanese economy after the 2011 tsunami. Japan’s nuclear energy sources were crippled on a much larger scale than the oil refineries on the East Coast which stopped production ahead of the storm. Japan is facing energy shortages more than a year after it switched off its stricken nuclear reactors. In contrast, the bunched-up demand for petroleum products after the storm will exert some pressure on prices fleetingly within the US, not globally.

Income lost after a natural disaster tells only part of the story. The destruction of around $25 billion in capital assets, which do not figure in the gross domestic product and some of them covered by insurance, will most probably not have a knock-on effect across the world. Global disaster losses in 2011 were $100 billion, principally because of the Japanese tsunami. Reinsurer Munich Re estimates such losses were just $12 billion in the first six months of this year. Insurance companies will not be overly strained to meet the $10 billion anticipated claims after the US storm — a single disaster would need to cause five times that amount in claims before insurance premiums begin to climb, according to analysts. And the international financial market has remained calm despite the two-day shutdown of US stock exchanges.

Although the US is the world’s third largest exporter after the European Union and China, the pattern of its trade, too, has lessened the impact of the storm. The US is a net importer of merchandise, which is more prone to disruption from natural disasters, and is a net exporter of services. The Japanese earthquake had broken global logistics chains for industries like cars and mobile phones; the impact will be lesser in the case of the US. Since the Federal Reserve embarked on indefinite quantitative easing, interest rates are expected to remain subdued. Capital flows into emerging markets may be affected as the US starts rebuilding its devastated states, but not significantly because the wealth lost is less than half a percentage of the national income. The channels through which the disaster in the US could have travelled — energy, trade and finance — to the rest of the world economy are simply not wide enough.