Do hurricanes hurt the economy?

The short answer is maybe. Generally, the overall impact of natural disasters is often close to neutral since lost output in certain sectors from destruction and displacement is then compensated for by a big increase in reconstruction and public spending.

The economic effect a devastating hurricane can have on an island like Bermuda can be found in a comparison with Ivan's destruction of the Cayman Islands.

One might say it is unfair to compare Bermuda to the Cayman Islands due to the differences in their topography as Cayman is clearly a flatter island and suffered immense flooding but the statistics give a picture of a dire scenario. According to the Cayman News Service: "The total economic impact to the Cayman Islands was estimated by the United Nations ECLAC team to be 3.4 billion (183 percent of GDP).

"Approximately 83 percent or 13,535 units of the total housing stock in the Grand Cayman suffered some degree of damage.

"Dwellings which were situated on the sea shore, in low lying, or swampy areas suffered the most severe damage.

"Older and less well constructed housing was also severely affected.

"Four percent of homes that were affected were so severely damaged that they required complete reconstruction...The total financial effect on the housing sector was estimated at CI$1,444,868,244. (1.4 billion)

"The financial effect on the finance (commerce) and tourism sectors were estimated at around CI$ 460 million each. Insurance coverage while it was widespread for both the private sector and government infrastructure only covered part of the assets damaged or destroyed and in most cases did not cover income lost or the business interruption.

"The ECLAC team estimated that the amount of per capita damage and losses was US$75,700 per person.

"This figure is the highest ever encountered by ECLAC."

The World Bank Group/International Monetary Fund has estimated the economic loss to Bermuda from Fabian to have been about $300 to $400 million or approximately 10 percent of GDP.

Local insurers were hit with roughly $125 million of which a great deal was reinsured. Fabian cost Argus about $2.5 million and BF&M about $3.7 million.

According to the Bermuda Government, Department of Statistics (BGDS): "Industries involved in the tourism sector were adversely affected as the Island's hospitality sector virtually shut down following the disaster...Tourism-related industries were among those hardest hit by the effects of the hurricane.

"Although the number of tourists to the Island declined only marginally for the year 2003, the last quarter of the year saw the number of visitors tumble 12 percent.

"This entire decline was attributable to fewer air arrivals as there was an increase in the number of tourists arriving by cruise ship.

"Travel receipts - expenditures by tourists - fell 8.2 percent, as tourists arriving by air generally spend significantly more than those arriving on cruise ships.

"Hotels and restaurants recorded a drop of 3.4 percent in output, highlighting the impact of fewer tourists to the Island

"Many tourist accommodations, including large resort hotels, were forced to temporarily close to effect repair and renovation work to hurricane damaged property.

"The hotel sector temporarily lost about 20 percent of its' capacity - roughly 1,200 beds.

"Diminished capacity rates in the hotel sector carried on well into the 2004 season.

"Employment in the hotel sector fell 3.2 percent (100 fewer jobs) while the number of employees in the restaurant industry declined 4.3 percent (79 fewer jobs)."

At the same time, Fabian hit in September which is late in the tourist season and hotels, such as the Fairmont Southampton, used the opportunity (and insurance proceeds) to upgrade their property.

Other hotels, such as Sonesta, closed down after experiencing significant damage.

Another negatively hit sector was agriculture. Output declined 1.6 percent in 2003 after a big surge in 2002. Hurricane Fabian actually wiped out entire fields of crops.

A great deal of the foliage that was left in fields was burnt off by salt water spray whipped up by the hurricane.

Government expenditures also tend to increase due to repair costs on public.

According BGDS, Fabian resulted in an "output in the public administration sector jumping 16.6 percent (+$35 million) in 2003 as Government increased expenditures in an attempt to repair public sector assets damaged during the hurricane.

The 2003 increase in output for the public administration sector is well above the previous five-year trend of 5.3 percent. The public sector experienced damage to its infrastructure, buildings and equipment, including uninsured assets such as the Causeway, which required extensive repairs. Monies were also spent on emergency services during the clean-up in the immediate aftermath of the hurricane".

There are positives. If you have recently been to Lindo's, Marketplace, Maters or Gorham's I'm sure you will agree that the impending hurricane has helped retail sales. Given Bermuda's 27th consecutive slide in retail spending this would actually be a welcome relief. In fact if you take some analysis from September 2003 retail sale report in Bermuda you find that Fabian actually contributed to the strength in sales for that period: "Gross receipts for the food store sector jumped 4.3 percent compared to the previous years' level. Purchases for emergency supplies and stocks of non-perishable goods in the aftermath of Hurricane Fabian resulted in an increase in the overall value of sales compared to September 2002. In the service station sector, petrol sales were up 9.1 percent year-over-year. This was attributed primarily to the abnormal rush to 'fill-up' motor vehicles, purchase gas for generators and kerosene oil for household lamps prior to the arrival of Hurricane Fabian." October 2003 retail sales jumped 13.9 percent - the single largest monthly gain since September 1999. A bump in retail sales here in Bermuda would be very helpful after some 27 straight months of declines.

Fabian also greatly assisted in a mini-revival in construction. This area has been hit extremely hard in recent quarters so a rise in activity would also be a welcome development. Post Fabian the quarrying industry got a huge boost as the government quarry was re-opened after being closed for over a decade. Residential construction benefited from the restoration work required after the hurricane.

The bottom line is that natural disasters offer a mixed effect on the economy. Consumption tends to be positively effected in the short run. The offsetting effects on tourism and the construction industry tend to linger a bit longer in duration. Let's cross our fingers and hope that Igor has very little negative economic effect. Even more important, let's hope everyone stays safe.