Macroeconomic impact of weather disasters: a global and sectoral analysis
Summary
Focus
Weather disasters can inflict macroeconomic damage. The effects on aggregate supply and demand depend on the type of weather disaster and can be temporary or persistent. If and how extreme weather shocks transmit to economic activity and, in turn, inflation are key for monetary policy. If the effect on gross domestic product (GDP) and inflation is temporary and small, monetary policymakers may adopt a "look-through" approach. By contrast, if a rise in prices triggers higher inflation expectations, monetary policy may need to tighten, or if disasters have a large and persistent negative impact on growth, it may need to loosen.
Contribution
To better understand the impact of weather disasters on growth and inflation we look at granular sectoral effects and different components of inflation. We analyse seven types of weather disaster: cold waves, droughts, floods, heat waves, landslides, storms and wildfires. First, we estimate their effects on quarterly real GDP growth in 89 countries over 2000–24. We then study their effects on the annual output of different sectors in 54–131 countries. Finally, we consider their effects on monthly food, energy, core and headline inflation in 151 countries. Our estimations use panel local projections, and we focus on cumulative effects on GDP over 16 quarters and on prices over 12 months.
Findings
We find that the negative effects of weather disasters on GDP can be quite sizeable and long-lived: −2%, −1% and −0.4% after average-sized droughts, landslides and wildfires, respectively, over four years. At the sectoral level, agriculture, forestry and fishing as well as mining, construction, water and energy are negatively affected by several types of weather disaster. Most disaster types have relatively small and short-lived effects on inflation, but with larger and more persistent increases in food prices than in the other components of the consumer price index (CPI). Fiscal space and insurance can reduce the negative impact of natural disasters.
Abstract
Whether and how extreme weather shocks transmit to economic activity and, in turn, inflation is key for monetary policy. We look at the macroeconomic effects of different types of weather disaster for up to 151 countries over 2000-24. We study their macro-level and sectoral effects on GDP growth and on relevant sub-components of inflation. Using local projections, we find that the negative effects on GDP can be quite sizable and long-lived: -2%, -1% and -0.4% after the average-size droughts, landslides and wildfires, respectively, over four years. At the sectoral level, we find that agriculture-forestry-fishing and mining-construction-water-energy are negatively affected by several types of weather disaster. Most types of weather disaster have relatively small and short-lived effects on inflation, but with larger and more persistent increases in food prices than in the other components of CPI. Fiscal space and insurance can reduce the negative impact of natural disasters.
JEL classification: E31, E32, O13, Q54
Keywords: climate change, GDP growth, inflation, natural disasters, sectoral production
