Storm that killed US consumption?

SCMP September 5 2005

Unpredictable events can have consequences that are equally unpredictable. So, four years after September 11, it is worth contemplating the possible global effects of Hurricane Katrina.
I was in the United States during 9/11 and was struck by the general lack of hysteria at that time. There was little to suggest that the attacks would become an excuse for a war in Iraq and an obsession with homeland security that has overridden long-cherished US standards of justice. Least of all could one have forecast that the outpouring of sympathy for the US would so quickly turn into an unprecedented surge in global anti-Americanism.

Today, Osama bin Laden looks no closer to gaining his objectives. But the position of the US in the world has been seriously undermined by actions at home and abroad.

In terms of emotional impact, Katrina seems likely to be very much less than September 11, even if the eventual death toll is greater. But the economic impact will be dramatically bigger, certainly in the short term and possibly in the long term.

The most relevant comparison is not 9/11 but the 1995 Kobe earthquake, which killed 5,000 people and cost some US$110 billion - 2 per cent of Japan's gross domestic product. While the physical recovery of factories and port facilities was rapid, Kobe cast a shadow over Japanese sentiment, exacerbating the collapse of the asset price bubble.

Whether Katrina will be bigger or smaller than that is less important than the long-term impact - if any. The prices of petroleum products have soared, but judging by the muted reaction of the markets, it is a short-term blip. It will probably delay interest-rate rises, and government relief spending will offset production losses.

But there are longer-term consequences that could come out of this. First, it may finally help kill off the consumer confidence and house-price surge that have sustained consumption far ahead of income growth. Commentators have long been warning that "this cannot go on". Such trends are ended not by rational calculation but by the impact of unpredictable events. Once confidence cracks, it will not matter what Federal Reserve chairman Alan Greenspan does with interest rates. Maybe an easy-money response to Katrina will work again, and Americans will carry on their free-spending ways. But they may not.

Could Katrina be the straw that finally breaks the consumer's back? If that is the case, might Americans make a virtue out of reduced consumption? Could they be persuaded that it is their patriotic duty to cut down on their driving so as not to strain fuel supplies? Will they finally come to recognise that saving is a long-neglected virtue? In which case, Asian exporters should prepare for some shocks.

The oil output and refinery losses from Katrina may also lead Americans to recognise that no amount of military might and homeland security can protect their economy from its vulnerability to disruptions in the oil supply. So, to look on the bright side, the global consequences of Katrina could be much short- to medium-term pain for Americans and many Asian exporters.

But it may also be a watershed leading to a reduction in US consumption, a global rebalancing of trade and to the US becoming the leader - not the laggard - in the battle to reduce greenhouse gas emissions.

Alternatively, it could lead to a retreat to economic nationalism similar to the impact of 9/11 on foreign policy. Either way, Katrina looks likely to prove an event with far-reaching implications for us all.

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