Katrina to hit US growth

Hurricane Katrina’s devastation of the US Gulf Coast will hit the world’s biggest economy harder than any previous storm, analysts...

Hurricane Katrina’s devastation of the US Gulf Coast will hit the world’s biggest economy harder than any previous storm, analysts say, but the blow to growth could be more than offset later by the boost from reconstruction.

Katrina’s destructive journey in southern US last week wrecked New Orleans, displaced hundreds of thousands of people and may have killed thousands.

Damage done is estimated at $25 billion and disruption to US refineries pushed oil prices to record highs above — $70 a barrel.

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“We expect Hurricane Katrina to have a much larger effect on the US economy than its predecessors,” Goldman Sachs said in a research note, predicting negative hits to real gross domestic product in the third and fourth quarters this year to lie between 0.5 and one percentage point.

But the reconstruction effort could help later to reverse those growth losses, the bank said. “Growth rates for the first two to three quarters (of 2006) could be boosted by one percentage point or more.”

Barclays Stockbrokers say the impact of soaring oil prices — which many believe will hurt economic growth — should be canceled out when the rebuilding begins.

“The estimated $35 billion drag on the US economy from high oil prices should be more than met by the reconstruction programme worth as much as $50 billion,” Barclays said in a research note.

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Shares in construction firms with exposure to the US market and oil majors have gained as investors bet on increased revenues in the wake of Katrina. But the hurricane-driven surge in the cost of oil could mean high oil prices are finally felt at the bottom line, Barclays added. Many companies have so far managed to absorb higher input costs resulting from soaring fuel prices.

“As we enter the last month of the quarter, there is the fear that the market will have to cope with some profits disappointments,” it said.

Barclays predicts oil prices could fall back to $55 a barrel having peaked at $70, but other analysts argue oil prices will hold near current levels — leading to further concerns about inflation and consumer spending.

“Oil has been going up for some time, and crude is not near $70 a barrel just because of Katrina,” Dresdner Kleinwort Wasserstein’s investment grade credit research team said in a note. “We believe oil prices will remain high and volatile.”

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And as Katrina influences economic growth, the cost of fuel and company profits, the hurricane could also influence US monetary policy, Goldman Sachs said. “Hurricane Katrina has just handed them (the US Federal Reserve) a big piece of new data — namely, that conditions affecting the near-term outlook are suddenly much more uncertain than they were just a few days ago,” Goldman Sachs said in a note.

— Reuters