Natural catastrophes are on the rise, according to a new report from TD Economics, and businesses and policymakers should be incorporating this reality into their planning.
On Monday, TD issued a report that looks at the increasing frequency of natural disasters such as damaging floods, storms and earthquakes. It says that over the past 30 years these sorts of events have become increasingly common.
http://www.td.com/document/PDF/economics/special/NaturalCatastrophes.pdf
“We’re seeing a similar trend in Canada, where severe weather that used to occur once every forty years is now occurring once every six, in some regions of the country,” it says. “This has serious ramifications for Canadians that popular economic indicators, like GDP, do not capture.”
Indeed, the report notes that these events are having major impacts on people, property, and prosperity in Canada, but that the economic and financial impacts tend to be masked by the way that economic indicators are calculated.
“In the short-term, natural catastrophes tend to follow a similar pattern of economic disruption. The immediate damages create a drag on output, spending, and labour hours. Immediately following the event, reconstruction efforts offset these losses and, often somewhat paradoxically, provide a net boost to economic growth,” it says.
However, this outcome reflects the way GDP is calculated, and “do not imply that catastrophes are ‘good for the economy’,” TD says. Moreover, short-term increases in GDP due to reconstruction spending are also offset by long-term costs, it notes. “In short, the immense infrastructure damages and human tragedies caused by natural catastrophes have a devastating impact that popular economic accounts tend to overlook,” it says.
While most natural catastrophes impact individual businesses, TD says that they do not appear to adversely impact financial markets. “The likely explanation for this is that investors feel impacts will be short-lived, and government disaster assistance, along with injections of insurance capital, will dampen the impact on businesses,” it says.
Yet, it stresses that, over the long-term, natural catastrophes have significant financial implications. “As events occur more frequently, infrastructure damages will put a major strain on the pocketbooks and productivity of governments, firms, and households alike,” it says. “If no efforts are made to upgrade infrastructure to withstand harsh conditions, natural catastrophes could cost Canadians dearly – an estimated $5 billion per-year in 2020 and $21-$43 billion by 2050, in infrastructure damages, healthcare costs, reduced performance of Canadian industry, and lost labour hours.”
The report suggests that some of these costs can be mitigated by upgrading infrastructure to be more prepared for these sorts of events, noting that some estimates claim that “every dollar invested in adaptation now, will yield anywhere from $9-$38 worth of avoided damages in the future.”
Indeed, TD advises businesses and policymakers to start thinking of the long term-implications of more frequent natural disasters, and says they should out greater emphasis on catastrophes when making investment decisions. “Businesses need to identify how these events impact their bottom line and adjust longterm financial plans accordingly. Governments need to take a close look at their inventory of infrastructure to identify vulnerabilities and areas where proactive adaptation can prevent future damages, loss of life, or economic disruptions,” it says. “Awareness and preparation is the first step toward ensuring the safety of people, property, and prosperity for Canada’s future.”