Economic impact of Katrina to be severe

Hurricane Katrina could dampen real gross domestic product (GDP) growth in the second half of the year by up to one percentage point, according to the Congressional Budgetary Office (CBO).

The government body predicts that the macroeconomic effects of the disaster will be greater than those of previous major hurricanes such as Andrew and Hugo because of the greater devastation and the destruction of energy and port infrastructure.

This has inevitable implications for the food industry, heavily reliant on the transportation and storage facilities in and around New Orleans. Just over 60 percent of corn and soybean exports originate from the New Orleans area, while over a quarter of all coffee stored in the United States is in New Orleans.

The Mississippi River, the cheapest route for the shipping of many crops and other commodities destined for overseas and domestic markets, has become inaccessible in parts. Up to 300 barges containing grains and other products have been left stranded.

Officials believe that they now have a much clearer picture of the hurricane's economic cost. Production of electricity, oil, refined products and port services in Louisiana, which makes up about 1.2 percent of US GDP, will be sharply curtailed for at least a few months, and the loss of port facilities will be felt across the US.

The CBO says that if half of that product were lost for three months - September to November - the level of real GDP would be lowered by about 1 percent from whatit otherwise would be, cutting about 1.3 percentage points from the annualized growth rate for the third quarter and about 2.7 percentage points from the fourth quarter.

Preliminary estimates suggest that privately insured losses from Hurricane Katrina could exceed $30 billion. By comparison, insurers paid about $32.5 billion after 9/11. Although no estimates have been published, federal flood insurance payments are also likely tobe substantial.

The CBO insists however that it is still too early to estimate the ultimate impact of Hurricane Katrina on federal spending. Thus far, the President has requested and the Congress has appropriated $10.5 billion in emergency assistance, with $10 billion of that total going to the Federal Emergency Management Agency's (FEMA's) disaster relief account.

On a slightly more optimistic note, the CBO believes that the reduction in petroleum supply will not necessarily hurt economic activity nationwide significantly. If most of the refineries come back online during the next two weeks and there are no significant periods of total unavailability of product - that is, if rationing is done through the price mechanism alone - energy use will tend to be put to its highest-value uses, and economic activity will not be seriously affected.

The pipelines for refined product have been largely restored, but three of the major refineries that were shut down may not reopen for more than a month, and petroleum production from some oilrigs in the Gulf will be curtailed for many months.