Hurricane Milton has impressively highlighted the increasing threat of tropical cyclones. In our current deep-dive publication, we look at the topic of tropical cyclones and examine the economic ripple effects in more detail. In our second publication, we analyze the cost of rising waters for European families, do a fiscal policy reality check for France and Italy, and provide an outlook on the next ECB meeting on October 17. In addition, we have updated a few country reports.
- Tropical cyclones (TCs), are among the most destructive extreme weather events globally, causing an average of 43 deaths and USD78mn in economic damages daily. In the US, the economic costs have escalated dramatically, with the decade from 2010 to 2019 witnessing USD731bn in losses due to super-hurricanes Harvey, Irma and Maria. The current decade has already incurred USD460bn in damages, double the total losses from 1980 to 1999.
- Global warming, increasing urbanization and the concentration of residents in densely populated coastal areas are set to worsen the impacts of tropical cyclones. Under most emission scenarios, except for the low-emission pathway (RCP2.6), the population exposed to tropical cyclones is expected to rise significantly by 2100. In a "hothouse world," the number of affected people could increase by 23% by 2050 and 84.2% by 2100.
- While immediate economic losses from tropical cyclones are evident, the ripple effects on global supply chains and maritime trade often go unnoticed. Ports, which handle about 80% of global trade, face significant disruptions due to extreme weather, leading to costly downtime and widespread economic consequences. Major events such as Hurricane Katrina in 2005 shut down the Port of New Orleans for nearly four months, causing global grain shortages and spiking commodity prices. For instance, in 2023, tropical cyclones caused 117 days of port downtime globally. As climate change intensifies, these ripple effects are projected to worsen, with port-related export value at risk increasing by up to +38% to USD312bn.
- Taiwan serves as a valuable case study due to its critical role in global supply chains and its high susceptibility to tropical cyclones (typhoons). Situated in the Western Pacific, Taiwan experiences three to four typhoons annually, with its mountainous terrain intensifying the impacts through severe rainfall, flooding and landslides. As the producer of over 60% of the world’s microchips, disruptions in Taiwan due to cyclones have significant ripple effects on global supply chains. Estimates suggest that cumulative external economic damages from TC-induced shocks could range from USD84.7bn to USD94.6bn by 2050. China, Taiwan's largest trading partner, faces the highest potential losses, followed by the US, Japan and South Korea. The primary sectors affected are computers, electronics and optical equipment. While Taiwanese companies bear two-thirds of the total TC-related damages on average, in some sectors such as electrical equipment and motor vehicles, the external damage share is above 50%.
- From 2040 to 2050, the supply-chain disruptions caused by cyclones could halve future return expectations for the stocks of Taiwanese semiconductor companies, with cascading effects on global equity markets. Under the most severe climate scenario, annual growth rates for these stocks could drop from +8% to around +4%. Despite Taiwan's small economy, its dominant role in the semiconductor sector means that disruptions can ripple through global equity markets. The S&P500, for example, could see its returns reduced by 2pps due to cyclones, lowering long-term expectations to around +6% per year.
- Without improved adaptation measures and enhanced resilience, the economic consequences of tropical cyclones are likely to escalate as these events become more frequent and intense. As climate change intensifies, more countries will surpass their resilience thresholds, leading to severe economic damage and weakened capacity to cope with future hazards. Investing in adaptation measures, such as improved infrastructure, early warning systems, financial safety nets and nature-based solutions, can mitigate the economic costs of tropical cyclones and raise a country’s resilience threshold. National Adaptation Plans (NAPs) under the UNFCCC are critical tools for adapting to climate change, with 140 countries engaged as of 2023. These plans are central to COP negotiations, particularly regarding financing, as developing countries seek significant funds for adaptation efforts.
- While adaptation helps reduce the impacts of extreme events, it is not enough on its own. Limiting global warming to 1.5°C can significantly reduce the severity of tropical cyclones, thereby safeguarding economic stability. Key for effective climate-change mitigation is high carbon pricing that accurately reflects the true economic damage of carbon emissions and incentivizes emission reductions. Accounting for tropical cyclone damages would increase carbon pricing by +44% in cyclone-prone countries and by +22% globally.
The full report for you here
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- The cost of rising waters for European families. Storm Kirk is the latest to highlight Europe’s vulnerability to severe flooding, just a month after Storm Boris triggered severe flooding across Central Europe, impacting nearly 2mn people and causing insured losses estimated at EUR2-3bn. With climate change increasing the frequency and intensity of flooding events, households are paying the price. We find that a 1-meter rise in river flood reduces household disposable income growth by -0.08% on average. Between 2000 and 2010, families in France, Italy and Germany experienced total cumulative disposable income losses of EUR16,400, EUR10,500, and EUR7,800. An already hefty price which could rise further by as much as +40%, +60% and +24% over the next decade, even under climate mitigation.
- Fiscal policy reality check for France and Italy. October’s multiple fiscal deadlines will be the first test for the EU’s reformed fiscal rules; all eyes are on France and Italy’s recently announced medium-term fiscal plans. Italy seems to have committed to some fiscal discipline, on top of positive developments on the revenue side. Its fiscal deficit is now expected at 3.8% of GDP in 2024 (from 4.3% previously estimated) and the primary balance is already returning to a 0.1% surplus this year. However, given the limited details from the government, some assumptions such as the 1% target growth for this year and the catch up in NGEU spending, seem overly optimistic. Meanwhile, the French fiscal deficit has been confirmed at -6.1% of GDP in 2024, the largest fiscal slippage the country has registered since 2000 (excluding 2009 and 2020). The -5% of GDP fiscal deficit target for 2025 looks unrealistic and we expect a fiscal slippage of -0.5pp. In this context, a potential downgrade from its current AA- rating is a possibility since France is currently borrowing at similar conditions as Spain (rated A-).
- Good things come in threes? ECB to cut again amid cloudy outlook. At its next meeting on 17 October, we expect the ECB to cut the deposit rate for a third time this year to 3.25%. With leading economic indicators surprising on the downside and inflation at 1.8% y/y, speeding up the rate-cutting cycle seems appropriate. Going forward, we still expect a terminal rate of 2.25% to be reached in the second half of 2025, though uncertainty remains high. Factors such as fluctuating oil prices and the outcome of the US elections could significantly impact growth and inflation, potentially altering the ECB’s course. With quantitative tightening accelerating on autopilot, government bond yields will face additional pressure as EUR 410 billion per year (3.3% of GDP) is offloaded from the ECB's balance sheet going forward. Combined with the fiscal outlook, there is little room for Eurozone spreads to narrow, despite lower policy rates.
All three stories for you here
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- Croatia
: Rated BB1 (low risk for enterprises), joining the Eurozone has reduced country risk
- Serbia
: Rated B2 (medium risk for enterprises), recent crises have revealed vulnerability to external shocks
- Romania
: Rated B3 (sensitive risk for enterprises), macroeconomic imbalances remain a concern
- Slovenia:
Rated AI (low risk for enterprises), moderate growth outlook but strong macroeconomic fundamentals