Earth, water, fire and air

09 May 2012

Standard Life Investments, the global investment manager, believes that the economic repercussions from natural disasters and the weather are significant and can be long-lived, complicating both policy making and understanding the business cycle.

In the latest edition of Global Perspectives the leading investment house examines how the weather and natural forces shape the economic environment in which we operate. From the regular seasonal cycle, to unexpected natural disasters, or human tampering with nature, the consequences are seen in volatile economic output and occasional policy misjudgement.

Douglas Roberts, Senior International Economist, Standard Life Investments said:

“There have been a series of major economic disruptions over the past few years due to natural disasters and weather events. By far the greatest impact was associated with the events in Japan in March 2011, which caused such devastation that major reconstruction efforts are only now beginning to repair the damage to the infrastructure. However, this reconstruction will only restore the economy to what it was, with no gain in overall economic wealth, so the country will have in effect “lost” potential GDP growth.

“Apart from natural disasters, rather less extreme weather events such as bad winters, hurricanes and floods can also complicate the economic landscape. The US National Science Foundation has observed that the influence of routine weather variations is as much as 3.4% of US GDP. As the incidence of severe weather events increases so too does the cost of insurance, impacting all sectors of the economy.”

Douglas concluded:

“We should not underestimate the consequences of natural disasters. It is quite clear that when the four classic elements of earth, water, fire and air “misbehave”, they can have a significant impact both on economies and investor perceptions of the true state of the economic cycle. Perhaps we should add “man” to the four classic elements, in assisting them to misbehave on an increasingly frequent basis. If global warming persists it is probable that the costs of “weather” to the economy can only increase.”