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December 4, 2022
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Cambridge Econometrics: Droughts alone could cost 1% of GDP in CEE in coming years

Natural disasters becoming a burden for economies of V4 countries and Romania

As heatwaves and droughts in the Summer of 2022 proved again, the number and impact of natural disasters in Europe, and especially in Central Eastern Europe, will continue to grow in coming years with so significant economic effects that need to be included in regional development plans. A historical analysis spanning 22 years by British consultancy Cambridge Econometrics highlights which regions are the most hit by natural disasters in Europe. The analysis shows that droughts and floods are historically the most likely natural disasters causing economic damage in CEE countries.

Heatwaves, hurricanes and sudden rises in sea levels result in a loss of global economic performance on average between 1-3% of GDP, according to the latest calculations of Cambridge Econometrics, and impacts on specific locations, regions and economic sectors could be significantly higher than the average. While economic losses are smaller in energy production and tourism, the agriculture and food sectors continue to suffer significant damages due to natural disasters and more and more areas of the economy are being affected.

Droughts cause significant damage in agricultural production, which is quite visible to all, and hotter and hotter summers result in falling productivity in other sectors,” highlights Dóra Fazekas, managing director of Cambridge Econometrics Hungary. “Extreme heat is becoming unbearable for workers, impacting construction and transport in a growing extent. Low water levels of major rivers and lakes cause a halt in water transport, energy production and other industrial activities and problems tend to occur more often in residential drinking water supplies.

Besides the growing number of economic sectors, the number of countries impacted by natural disasters is also on the rise. Based on expectations for average global warming of 1.5 Celsius degrees, southern countries in Europe will suffer 5-6 billion euros a year in economic damages from droughts only, and continental countries – like the V4 countries and Romania – will start seeing similar impacts, amounting to an average loss of 2.5 billion euros in annual economic output. In the CEE region, particularly Romania and Hungary will suffer the most from the effects of heat, resulting in a loss of 1.5% and 1% of GDP, respectively.

The analysis by Cambridge Econometrics looked at economic damages caused by natural disasters in regions of European Union countries since 1995. Member states suffered a total loss of 77 billion euros due to natural disasters in the period under analysis. Of the total sum, direct impacts accounted for 44 billion euros in damages, while 33 billion was lost due to indirect effects. Natural disasters cause the largest damages to economies in Central Eastern Europe and Southeast Europe, the analysis found.

In CEE, some regions in Romania, Czech Republic, Poland and Hungary are most hit by natural disasters. In these areas direct damages and economic losses amount to 0.2-0.3% of annual gross value added, while in specific years damages can reach 2-3% of GVA – roughly the same level of losses caused by the one-off economic impacts of the Covid-19 pandemic in 2020.

Countries suffering the most from natural disasters also tend to be poorer and their economies tend to be built on sectors and activities that natural disasters and the resulting supply chain disruptions can affect more severely, like agriculture, food sector and manufacturing.

Global climate trends clearly show that natural disasters are more and more likely to impact economies in CEE. Country development plans in these countries must consider the growing direct and indirect economic effects of natural disasters.

Economic impacts of natural disasters must be observed as an increasingly important factor in economic planning in CEE countries. Budgets must include investments which can mitigate the direct impacts of natural disasters, and development plans must be started that help strengthen economic sectors and activities less impacted by natural disasters, such as services and R&D,” added Dóra Fazekas of Cambridge Econometrics.

 

Cambridge Econometrics

 

Cambridge Econometrics is an economic research consultancy with offices in Cambridge, Brussels, Budapest and Northampton, Massachusetts. Its research activity primarily focuses on policy process analysis and forecasting using econometric modelling and data analysis.

Cambridge Econometrics Hungary was founded in 2018 with the purpose to spread economic consulting in Central East Europe and support economies of the region by using the approach, methodology and tools developed by Cambridge Econometrics.

A complex and connected world offers access to endless data. Cambridge Econometrics helps make the information transparent and provide clarity. Cambridge Econometrics’ econometric modelling show trends and calculate the outcomes of anticipated scenarios.

With its evidence-based insights, Cambridge Econometrics supports governments, businesses and non-governmental organizations in managing complex challenges facing society.

Cambridge Econometrics has developed a global, macro-econometric model, called E3ME, designed to address major economic and economy-environment policy challenges. The economics consultancy provides research, modelling and analysis in the following areas: innovation; infrastructure; tax and finance; sectors, trade and competitiveness; regions, cities and local areas; jobs and skills; inequality and poverty; population, migration and housing; health and social care; energy; climate; circular economy; and natural resources.

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