Dual threats: COVID and climate change

The pandemic has intensified existing stresses on U.S. state and municipal economies – with implications for investors.

The COVID-19 pandemic is exhausting local finances and may impact growth trajectories for years to come. As of mid-April, states and municipalities will need at least $500 billion in aid to shore up balance sheets as demand for services intensifies and tax revenue plummets, according to the National Governors Association. At the same time, hurricane season – and the economic havoc it wreaks – is officially upon us.

To understand the implications of this dual threat, we have combined our local economic coronavirus impact modeling with our climate change risk assessments. We find, regrettably, that:

  • Hurricane damage is expected to produce a negative local GDP impact along the Gulf Coast and Atlantic Basin ranging up to 1.9% annualized GDP loss over the decade
  • Some of the regions hardest hit by the pandemic may also have the greatest exposure to hurricane risk and costs from wind and flooding damage. For example, we estimate Miami-Dade County with a joint COVID/Climate annualized loss of 2.6% to 2030
  • Even those counties with relatively muted GDP impacts from COVID may face more significant losses after factoring in climate risks

As investors navigate the uncharted waters of COVID-19 and look ahead, we recommend that they, too, bear in mind this dual threat of climate change.

Examining COVID’s economic impact

After more than two months into the first shelter-in-place requirement in the U.S., a clearer picture of economic damage is coming into view: 40 million unemployment claims, downward earnings forecasts by impacted corporates, and severe localized GDP impacts at state and county levels. Based on the S&P Municipal Bond Index, yield peaked on 20th March with an unprecedented 125 basis points (1.25%) increase year to date (4.7 standard deviations away from past 10-year mean), dwarfing what was seen in the 2007-2009 crisis.

In assessing the continued risk and damages of COVID, we zoom in on regions with exposure to the accommodation, food services, retail, and transportation sectors, which have all been upended in the outbreak. We find some counties are exposed to annualized GDP losses up to 2.5% over the next 10 years above the GDP forecast without any pandemic risk, leading to a potential for further increase in municipal bond yields (or a drop in prices) ranging from an additional 25 to 80 basis points (0.25% to 0.8%), depending on the speed of the rebound.

The dual threat: overlaying climate risk

Local finances become even more dire after considering the potential for climate change related risks over the next decade. This year, for example, the National Oceanic and Atmospheric Administration’s (NOAA) Climate Prediction Center forecasts 6-10 hurricanes, with 3-6 specified as “severe” (Category 3 or above). These estimates are up from the 1981-2010 average of 6.4 and 2.7 respectively. NOAA cites a projected lack of El Niño and a historically warm 2019-2020 winter in the Northern Hemisphere as driving the above-normal activity.

Leveraging the Rhodium Group’s localized climate damage assessments, which projects annualized GDP damage from hurricanes, we find some counties in southern Florida, Georgia and Alabama may face an additional 1.7%+ annualized reduction in their local GDP over the next 10 years compared to a GDP forecast without considering climate risk. Some counties in North and South Carolina projected to have muted impacts from COVID, now have large local GDP impact when considering hurricane damage.

Case study: impact on Miami-Dade county

Miami-Dade County in Florida is expected to see a 0.88% annualized loss over the next 10 years in GDP due to exposure to COVID, without incorporating climate risk. After incorporating the added risk of hurricane exposure – we find projected losses fall further to a combined 2.6% annualized loss. Over the next 10 years, this combined impact amounts to a 30% difference in the GDP outcome by 2030, assuming 3.0% base case growth scenario for the region without either risk present.

The Bottom Line

The coronavirus outbreak has created a crisis both humanitarian and economic with potentially long-lasting implications. While there is still much impending uncertainty – the spread of COVID-19, reopening and reinfection rates, the ultimate speed of economic recovery, and the fact that the probability of hurricane landfall for any single location is low – we show that overlying climate risks exposes a dual threat to places and counties already struggling to recover from COVID. We believe investors must consider the added risk of climate change both now and in the future.

Co-authors: Amit Madaan, CFA, FRM Director, is head of modeling and research for sustainable investing in BlackRock’s Financial Modeling Group within BlackRock Solutions. Michael Kent is a vice president and lead climate strategist for BlackRock Sustainable Investing. Mark Hu is a member of BlackRock Solutions’ Financial Modelling Group. 

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