Article / 11 September 2017 at 23:23 GMT

Hurricane silver lining could come from infrastructure stimulus

Global Macro Strategist [Asia based] / Saxo Bank
Singapore
 
  • The impact of the latest hurricanes will reverberate across the wider US economy
  • Third- and fourth-quarter GDP could have 0.20% to 0.30% shaved off
  • There could be creative destruction produced, in infrastructure stimulus
  • December rate hike is still likely but inflation degradation could stay Fed's hand


By Kay Van-Petersen

Only last week, Hurricane Harvey struck Texas and Louisiana, and now Hurricane Irma has passed through Florida and could cause destruction in other states such as Georgia and Tennessee. Apart from the devastation these storms have had on the lives of people directly hit, there will be a much wider ripple effect on the US economy.

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Effect on GDP

One question worth asking is what the effect will be on US GDP in the third quarter.

It looks like we could be getting anything from 0.20% to 0.30% shaved off in third and fourth quarter GDP, before we see a bounce back in the first half of 2018. I believe that, despite the heavy human cost and tragedies, from an economic and growth perspective we could actually get creative destruction from the effects of these storms. Many part of the US are decades overdue for an infrastructure uplift, and this could be a form of unintended infrastructure stimulus.

It is also worth bearing in mind that there should be inflationary effects from repairing the damage done to crops and livestock, rebuilding and demand for materials and goods.

Hurricanes and the Fed

Can the current hurricane season change the US Federal Reserve's policies on interest rates this year? And what about Fed's balance shrinking? 

The Federal Reserve's balance sheet reduction should still be on track to be announced in September, and most likely kick off in October. The biggest question is will they hike in December. For now, I believe they will, but it remains fluid and any degradation in inflation could curb the Fed's hand. It is also worth noting that Vice Chair Stanley Fischer's resignation last week (to take effect in October) also takes weight out of the hawkish camp.

Real estate push

The hurricanes should push gasoline prices and may boost sectors of the economy, such as real estate. President Donald Trump wants fewer regulations and finds partial support from some Federal Reserve officials such as Governor Jerome Powell. Could the boost in real estate be the kick-off of a new financial crisis in the long term?

It may be too early to be thinking this way ... but it would bear watching. For now, the biggest deregulation being watched is towards the financial services industry, and in many ways it is also the easier to curb. For instance, reintroducing the Glass-Steagall legislation would do wonders for liquidity in the markets, as well as do a better job of protecting consumers' deposits (i.e. commercial banks stick to commercial activities, investment banks stick to investment bank activities, including property trading).


– Edited by Susan McDonald


Kay Van Petersen is Global Macro Strategist at Saxo Bank. You can follow him on Twitter: @SaxoStrats or @KVP_Macro. Please join us live for next Monday's Macro Call at 0830 [Singapore/Hong Kong], 0930 [Tokyo], 1030 [Sydney]. 


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