Pandora Event Bulletin: GDP@Risk in Houston

Note - (Photo source: U.S. Department of Defense)

Read this article on the University of Cambridge's Judge Business School website.

Pandora scenarios suggest Houston economy could lose $27 to $60 Bn of output as a result of Hurricane Harvey Flooding

The economy of Houston, Texas could lose $27-60 Bn of economic output in the next year as result of Hurricane Harvey, potentially exceeding the physical damage costs and insurance loss estimates.

Houston is currently suffering from severe flooding in the aftermath of Hurricane Harvey. In addition to the threat to human lives, and physical destruction of property, the flooding will disrupt the city’s economy, which will in turn influence the region’s economy, and has potential consequences for the US economy and internationally. Estimates so far of the total costs of the physical damage to the buildings and infrastructure of the impacted region from the wind, rain, and storm surge across the hurricane footprint, which covers a large part of the Texas Gulf Coastline, range as high as $100 billion. The consequences on the businesses operating in the region, and the economy generally, could be even more significant than the physical loss.

Houston is just a part of the affected region but it is one of the leading cities in the global economy and features as one of the 300 cities in the Cambridge Global Risk Index, that considers the potential impact to the economy from 22 different threats. Descriptions of flood depth and extent currently in Houston (Tuesday 29 August) suggest that conditions there are close to an event modeled in the Pandora Cambridge Risk Framework “FL1-USA_HOU-2017”: i.e. Houston’s economy in 2017 being impacted by a flood of “10% of city affected by flooding, reaching 1m depth in parts, low velocity water.”

The Houston metropolis in Texas is extensive and spreads over 4,200 square kilometers (1,600 square miles). Houston’s GDP is estimated at $314 Bn in 2016, and growing at a modest 1.4%, so prior to the flood was expected to have a GDP of $316 Bn in 2017. Houston’s main economy is service industries, historically centred around its role as the world capital of the oil industry, but increasingly technology, software, biotech and aerospace. The flooding has brought much of the economic activity of the city to a halt. Two major airports are closed. ExxonMobil and Royal Dutch Shell have shut down their oil refineries in Baytown and Deer Park. The water purification plants of the city are submerged.

The Houston area is used to floods. Hurricane Ike in 2008 caused major flooding, Tropical Storm Allison flooded the central business district of Houston in 2001. The city sits in low-lying estuary land draining into the Galveston Bay, with the Bayou drainage channels historically overbanking at intervals to flood the land that is now urbanized. In the Cambridge Global City Risk Index 2017, Houston is ranked 12th in the world for flood risk and 46th in the world by GDP@Risk from all catastrophes, with an estimated $31.83 Bn in expected annual loss (around 1% of its annual GDP) from all of the 22 threats in the index. Flooding is Houston’s top threat for potential loss of GDP, constituting around 25% of its total GDP@Risk.

The Cambridge analysis suggests that in a flood of the severity that it currently faces, the Houston economy could lose around $27 Bn of output that it would otherwise have been expected to produce, around 8% of a year’s economic output from the city. This is caused by the closure of workplaces, the disruption of the labour force, the loss of power and water supply, the suspension of airport and port traffic, and additional consequential economic effects such as demand shock and post-event inflation. Historical precedents of modern cities affected by floods, such as Hurricane Sandy in New York in 2012, New Orleans following Hurricane Katrina in 2005, and Mumbai in 2005, show that their economic outputs can be impacted for longer than the physical damage repair. Businesses, particularly service operations that are not tied to major manufacturing or processing facilities, typically relocate to other locations or cities, and many never return.

The flooding in Houston is not over yet. US officials estimate that an unprecedented 83 cm (33 inches) of rain has fallen on Houston since the hurricane made landfall on Friday. Heavy rainfall is continuing with the tropical storm stalled over the coast and continuing to convey heavy rain from the ocean to fall on the city, while at the same time the low pressure from the storm system is raising the sea level, preventing the river system from draining out to sea. Flooding is likely to intensify, raising the possibility of the flood event reaching the more severe local impact severity in our model of FL2: “25% of city area affected by flood waters that reach over 3m depth (more than one storey) in parts; Moderate velocity flowing water moderately contaminated “. Our modeling of this suggests that the economic consequences would be more than twice as bad, with GDP reducing by $60 Bn. If oil or pollution spills were to occur, or flood waters get even deeper, the economic costs could increase exponentially.

The Cambridge analysis includes estimates of how long it will take for the economy of Houston to recover from this hit. Houston is assessed as a highly ‘resilient’ economy – capable of harnessing and attracting economic investment for recovery, highly insured to repair much of its physical damage, and well-governed and socially cohesive, to suggest that the economy is likely to bounce back within a year or two of the catastrophe. We will be monitoring this recovery over the next months and years.

Some economists claim that catastrophes trigger economic growth, with the influx of funds that typically follow for reconstruction and recovery. We would certainly expect to see Government recovery stimulus funding for Houston after this event and private sector reinvestment. However where funds are used to stimulate localized recovery of an economy like Houston’s, those funds have been diverted from other potential investment areas, and with the destruction of physical assets, the effects of catastrophic supply shocks of this type are typically contractionary for the economy as a whole.

Other economic impacts could affect the rest of the world’s economy. Areas of the world that supply and trade with Texas will be impacted. Oil and gas prices internationally are being volatile as a result of the storm.

The Cambridge Centre for Risk Studies will be tracking and reporting on the Houston flooding as a case study in its city risk and resilience research.

For further details, contact enquiries.risk@jbs.cam.ac.uk.

Written by Simon Ruffle, Andy Skelton, Scott Kelly, Andrew Coburn, Arjun Mahalingam, Jessica Tsang and Daniel Ralph