Storm's economic impact is felt around globe

The economic waves from Hurricane Katrina are being felt not just in the US, but around the globe, particularly in countries such as Indonesia and Italy that already were straining from soaring oil costs before the storm disrupted energy supplies. In Australia, economists blame Katrina for a roughly 15-cent-a-gallon increase at the pumps. Germany saw gasoline prices jump by about the same amount, and a car drivers' association accused gasoline companies of gouging. In Asia, government subsidies widely used to shield consumers from high oil prices, which already were costly before the storm, are pressuring government finances and boosting the odds of a slowdown in consumer spending. Few economists expect the global economy to grind to a halt because of the storm alone. Just as the US has become more resilient to energy shocks in the past two decades, so have many of its trading partners. But given the US role as the world's economic locomotive, the likely slowing of growth and employment here in the months ahead is likely to restrain growth elsewhere. "Katrina has made it less likely that there will be [an energy] price fallback and more likely that there will be a price increase," says Michael Mussa, an economist with the Institute of International Economics. "It has made a growth slowdown that was already in the cards probably a little bit steeper and more likely." In April, Mussa projected growth in the global economy would slow to an annual rate of just under 4% in 2005 and 2006 from around 5% in 2004. He is sticking to his 2005 projection, but now says growth next year is likely to be a little more than 3%. Morgan Stanley is paring its world growth forecast to 3.7% in 2006 from its earlier 4.1%, primarily because of the accumulated impact of higher energy prices over the past few months. "Should the overextended American consumer falter under the weight of the energy shock - a distinct possibility, in my view - China would be on the leading edge," said Stephen Roach, chief global economist at Morgan Stanley. "Asian vulnerabilities cannot be minimized."

The effects on America's closest trading partners, Mexico and Canada, are more mixed, because both are net exporters of energy. But some analysts say Canada's economy is already feeling Katrina's effects. Canadian consumers are feeling the pinch of rising gasoline prices and natural gas prices are also heading north. With energy costs emptying their piggybanks, families will have a lot less to spend on other consumer goods - right at the same time demand for Canadian exports may slow from the hard-hit US economy, said Doug Porter, deputy chief economist with BMO Nesbitt Burns. “This is a clear-cut negative for Canadian growth,” he said. Growth in gross domestic product could be slowed by more than a half a percentage point in the final half of 2005. That would trim growth to below an annualized 2.5% in the third and fourth quarters - a disappointing drop from the annualized growth rate of 3.2% in the first six months. “I think damage will hit Canada as much as it hits the United States.” But not everyone is convinced hurricane Katrina will blow through the Canadian economy. Growth may be slowing but that's due to factors besides the natural disaster, argued David Wolf, chief economist with Merrill Lynch Canada. Blame the continued strong loonie, which reduces the appeal of Canada's exports, as well as steady high energy prices. And while Katrina's impacts will hurt the American economy in the next few months, that will be more than offset by a reconstruction boom by early next year, he added.

In related news, National Bank Financial economists say in a report that Ontario and Quebec will bear the brunt of Katrina's economic effects in Canada, and it's incumbent on the federal government to do more than just let the Bank of Canada mitigate the pain. Ottawa would be wise to cut income taxes soon, because consumers everywhere could use the boost and the federal government can afford it right now. The effects of soaring energy prices are being felt unevenly across Canada's regions and with gasoline prices soaring because of last week's hurricane, consumers are feeling the pinch directly. All this adds up to a shock for Ontario and Quebec, where much of the wealth depends on manufacturing. Tax cuts could dilute the effects of the oil shock. With an election coming up early next year and the federal coffers full, a tax cut would be an easy and fair way to help consumers across the country, they say. But Toronto-Dominion Bank economist Carl Gomez believes it is too early for such action. There's no doubt, he said, that Ontario and Quebec have been hit by a double whammy of a strong currency and high energy prices. But the high gas prices probably won't last for long, he said, and until the economic effects of Katrina are clearer, Ottawa is better off sticking to initiatives that boost the supply of oil rather than introducing major changes to tax policy.

Meanwhile, with retail gasoline prices in the US double what they were a year ago, the Senate energy committee yesterday called on Congress to create a special gasoline and oil act to protect citizens from "unconscionable profiteering." Congress began a series of hearings this week into gasoline prices in the wake of Hurricane Katrina. "Any oil company that is price gouging will find themselves in the witness chair where they will be made accountable," Republican Senator Pete Domenici said. The House of Representatives also plans to hold hearings today into why pump prices skyrocketed across the country. The probes comes as pressure began to ease this week now that the US government is releasing 30 million barrels of oil from its 700M-barrel Strategic Petroleum Reserve and the International Energy Agency is making 60M barrels of oil and petroleum products available. About three of the eight refineries in the Gulf were getting back into operation yesterday and two major gasoline pipelines from Louisiana to the US northeast were back in service. Crude oil for October delivery declined US$1.61 to close at just less than $66 a barrel on the New York Mercantile Exchange after hitting a peak of $70.85 on Aug. 30. Wholesale gasoline for October delivery fell nearly 13 cents to $2.06 a gallon. "Levels will fall back to close to where they were before Katrina," said James Overdahl, chief economist at the US Commodities Futures Trading Commission.

Finally, the price of steel used to make cars and industrial equipment is expected to rise by as much as 20% in coming months because New Orleans flooding has limited the supply and distribution of raw materials such as liquid hydrogen and scrap steel. The increase would be in addition to roughly 20% price increases by steelmakers including US Steel and Nucor, that became effective on Sept. 1 for shipments of key products like hot-rolled coil. As buyers begin stockpiling to avoid higher prices and shortages, prices could escalate by as much as US$80 a ton on such products, according to some analysts, although others forecast a more modest increase. Currently, hot-rolled coil, which is used to make cold-rolled coil, costs about $500 a ton. Concrete reinforcing bar, used in construction, also is expected to rise. "To the extent that supply becomes somewhat impacted, there could be further increases in steel prices in general as a result of Katrina. But the magnitude of those prices is yet to unfold," says Mark Parr, a steel analyst at KeyBanc Capital Markets.
(Canadian Press 050906, Wall Street Journal, Calgary Herald, Globe and Mail, National Post 050907)