Alberta floods a boost to GDP

With the rains now turning to sun and the waters receding, Southern Albertans are left with a post-flood nightmare — disrupted lives

By Pedro Antunes and Marie-Christine Bernard

Troy Media columnists

With the rains now turning to sun and the waters receding, Southern Albertans are left with a post-flood nightmare — disrupted lives, homes damaged or destroyed, business activity interrupted, and significant losses to private capital, inventories, etc. The flood of 2013 will not soon be forgotten.

But while things are steadily getting back to normal in Calgary, other communities continue to struggle. In High River, there is widespread damage to homes — some literally washed away, while many others will need to be torn down. Estimates of the losses are still being compiled, but when all is said and done, they’ll likely be in the billions of dollars.

Ironically, however, these losses will not significantly reduce the province’s economic performance this year, and the reconstruction effort will actually add to real GDP growth in 2014.

To understand the consequences of major disasters on the economy, one needs to understand what it is that economists and statisticians measure when calculating GDP. Essentially, our national accounting framework is meant to measure income flows over a set period of time and not losses to our stock of capital or wealth. So while the costs of the flood are steep, both in terms of dollars and distressed lives, we need to take a step back to weigh the various impacts of the flood on income flows.

One approach is to look at the net gains or losses on an industry-by-industry basis. What might the impact be on retail sales, oil production, the insurance industry and construction activity? And what are the immediate consequences versus those over the next year or more? Of course, the immediate repercussions are almost all negative. Many businesses were forced to shut down, and some remained without power for over a week in Calgary and much longer in other regions. However, the loss in retail activity will be short-lived. Over 100,000 displaced residents are receiving cash through debit cards ($1,250 per adult and $500 per child) provided by the provincial government to help alleviate their troubles. Most are back at work already and will likely be rushing to replace damaged household furnishings.

With the flood arriving just days in advance of the Calgary Stampede, the potential impact on tourism was a major concern. But while a few events were cancelled, the Stampede was still headed for success, even if the attendance numbers are down a bit. The fairgrounds were cleared and cleaned in time and events started as planned – a phenomenal feat considering Stampede staff and volunteers had just days to get things back on track. By the start of the Stampede, downtown hotels were booked solid and tourists were opening wide their wallets and purses — sales of Stampede Must Go On Come Hell or High Water t-shirt were booming!

So while the impact of the flooding on retail sales and accommodation and food sectors will likely be negative in June, we expect economic activity to rebound strongly in July and the ensuing months.

Moreover, the impact on many other industries will be strongly positive in coming months. In addition to the provincial government’s debit card program, the government of Alberta and the federal government have stepped up to help households rebuild their homes. The federal government has already committed $1 billion, a sum that will likely be matched by Alberta. And while the losses to assets aren’t measured in the GDP numbers, the rebuilding efforts certainly will be, through a boost in construction activity that will peak later this year and into 2014.

Alberta’s private insurers will also help to finance the reconstruction. Some estimates suggest that claims could be three to four times what they were during the heavy flooding of 2005. This means that an additional $700 million to $1 billion in claims could be paid out in coming months. These sums will add to GDP as residents repair and rebuild their homes and purchase new furniture. (However, the impact is partly negated by the direct losses to GDP incurred by the province’s property and casualty insurance sector, to the extent that the impact of those losses is felt in the province.)

Overall, the net impact on the economy will be modest in 2013, taking about 0.1 percentage points from growth. But as the rebuilding effort ramps up, we expect to see as much as 0.4 percentage points added to growth in 2014. As more facts surface and estimates of losses are solidified, we will likely make revisions to our impact analysis.

But as we’ve seen with past disasters in Canada and elsewhere, the overall impact of this disaster on GDP will undoubtedly be positive.

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