As the world continues to experience record-setting climate events and “once-in-a-lifetime” storms, it comes as no surprise that these events are heating up your wallet as well. But now a new study by FIU Business researchers reveals exactly how these events can significantly impact the economy.
The research, led by Florent Rouxelin, assistant professor of finance at FIU Business, used a unique dataset of extreme weather events in Australia, called the Australian Actuaries Climate Index (AACI), to analyze their effects on key economic indicators such as GDP, inflation, and unemployment.
"We're trying to use extreme weather data to find causality between changing climates and various macroeconomic factors," said Rouxelin.
The AACI tracks temperature, rainfall, drought, wind and sea level and has been collecting the data since 1981. By employing advanced statistical techniques, including principal component analysis (PCA) and vector autoregression (VAR), the study aimed to establish causal links between extreme weather events and economic changes.
Since 2000, there has been an uptick in rising temperatures in Australia and the data shows the extremes are happening more often and getting more intense. The weather events disrupt supply chains, agriculture, commute for workers and tourism takes a hit as well.
Key findings show that extreme weather events initially cause a decrease in GDP and a spike in unemployment, followed by a recovery period, but the slump in GDP can last up to two years.
In terms of inflation, extreme weather can initially lower the consumer price index (CPI). For example, people may begin to stock up on essential items in anticipation of the hurricane, but once those items sell out and the supply chain is disturbed due to the weather event, prices begin to climb- from household essentials and food to construction materials.
The big surprise for researchers was how this pattern closely resembles the economic impact of the COVID-19 pandemic.
"Whatever intuition or mechanism you have in mind on something that has happened for COVID is what we find also in the paper," Rouxelin noted. “They're different type of disasters, but the economy is going to react the same way.”
The research also indicated that central banks typically respond to these events by lowering interest rates to stimulate economic growth and combat unemployment.
“More money supply means more money in the economy, more incentive for firms to create jobs and create growth,” said Rouxelin. “And ultimately you see that the gross domestic product in the country picks up.”
While the study focused on Australian data, Rouxelin believes the results can be generalized to other countries, including the United States and European nations. He noted that the findings are particularly relevant to Florida, where hurricanes and extreme weather disrupt supply chains, agriculture, and tourism, causing significant economic ripple effects.
This innovative approach to studying climate change's economic impact could provide valuable insights for policymakers and economists as they grapple with the growing frequency of extreme weather events, he said.
Rouxelin conducted the research with Ravipa Rojasavachai and Li Yang of UNSW Australia Business School, and Yumeng Gao of Yale University.