Katrina may curb economic growth into 2006
(AP)
Updated: 2005-09-05 09:17

Unleaded gasoline now averages $2.86 a gallon nationwide, an increase of about 15 cents in less than a week, costing consumers an additional $57 million a day. That is still below the inflation-adjusted high of $3.11 a gallon reached 25 years ago, but it is getting close enough to become a significant threat to consumer spending in other areas, and not just in the United States.

Hurricane Katrina survivor Paul Metzler pulls his boat along Paris St in Chalmette, a community about 7 miles (11 km) east of New Orleans, September 3, 2005. For the first time since Hurricane Katrina struck on August 29, rescuers are scouring the community for survivors. [Reuters]

In Katrina's aftermath, forecasts for U.S. economic growth in the fourth quarter have dropped from 3.5 percent on an annualized basis to 2.5 percent. And that is probably what gross domestic product will average for all of 2006, economists said.

Some local economies will no doubt benefit from the fact that New Orleans will be out of commission for months. Tourists who might have visited the Big Easy will go elsewhere, corporate conferences will be relocated and cities throughout the South will witness a tightening of their rental housing markets as evacuees from New Orleans reestablish their lives elsewhere.

But when winter arrives and the higher cost of home-heating strikes the Northeast and Midwest, consumer spending, particularly among lower income families, is expected to take a noticeable hit.

Michael P. Niemira, chief economist at the International Council of Shopping Centers, said the U.S. retail sector will face its toughest Christmas since the Sept. 11, 2001 terror attacks.

The impact of higher energy prices is already hitting hard in Europe, where up to 60 percent of the retail price is made up of taxes.

The price of gasoline rose to the equivalent of $6.70 a gallon in Germany and hit a record high in Switzerland. Spaniards were paying more than $5 per gallon at the end of last week, up nearly 7 percent from a week earlier.

Eurasia Group's Halff noted that the impact soaring energy prices will have on household budgets will be even more significant in emerging economies around the globe as governments begin to roll back costly fuel subsidies.

Surging oil prices have already sparked an economic crisis in Indonesia. The nation's currency, the rupiah, fell to a four-year low against the U.S. dollar as ballooning fuel subsidies to keep prices affordable for the masses are bleeding the government's coffers.

Seeking to avoid a meltdown, the central bank hiked interest rates and Indonesian President Susilo Bambang Yudhoyono told the nation on a televised address that he would have to cut subsidies at some point — in effect raising gasoline prices for consumers.

With the Chinese economy growing at a rate of 9.5 percent, no one is forecasting a dramatic slowdown there, but the impact from higher energy prices has already been felt in shrinking profit margins, regional shortages of gasoline and diesel, auto purchases and international travel, among other areas.

To offset higher oil prices in Thailand, the government has introduced an economic stimulus package and an array of energy-saving measures, including mandating that billboards can be illuminated for only three hours a day and requiring gas stations to close at night.

Thai fisherman have also felt the pinch. In recent months, more than 5,000 fishing boats, accounting for almost one-third of total fishing boats in southern Thailand, have gradually stopped operating as fuel costs ate up their profits, according to Prasant Silphiphat, president of the Fishermen's Association of Thailand.

Andy Xie, an economist at Morgan Stanley in Hong Kong says that economic growth rates across Asia are down by a third to a half of last year, thanks mostly to higher oil costs. "Growth rates could decelerate by another 1 percentage point due to further rises in oil prices," he wrote in a recent report.

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