Why is it so hard to work out the cost of flooding?
- 17 February 2014
- From the section Business
How would you go about working out how much the flooding in recent weeks has cost?
You could look at the impact it might have on the measure we usually use for the economy: gross domestic product, or GDP.
But doing that would tell you everything you need to know about what is wrong with GDP.
Imagine your home has been flooded - at the last count 5,800 properties have been.
You're going to have to find somewhere to live until the water has abated. You'll have to find a way to dry out your floor and walls, replace the damaged carpets and furniture and make your home inhabitable again.
It can take years and it's expensive.
GDP measures all the activity in the economy, so if you pay someone to take away your ruined sofa and buy a new one, that's good for GDP.
When councils buy sand bags or pay overtime to people working to alleviate the problems, all of that is good for GDP.
So what would be bad for GDP? Anything that reduces the amount of activity.
If shops cannot open or farms cannot function or people cannot get to their offices it reduces GDP.
If trains aren't running so people can't buy tickets, or visitors to an area are put off coming then the level of activity in the economy would be lower.
So in GDP terms, there are pros and cons from flooding. But in any real assessment of the state of the economy this is clearly nonsense.
The householder who has spent all of this time and money on repairing his or her home will, if they are lucky, end up with their house exactly as it was before the storms.
A large amount of time and money will have been spent on restoring things to how they were before, which looks like a big waste.
Added to this, the funding for a lot of this clear-up will come from insurance companies, which may raise premiums in the future.
If premiums go up then people have to pay more money for the same product, which is a waste and will also raise inflation.
So you've probably seen a number of estimates so far of the amount the floods will cost the economy, which will have been worked out on the back of a cigarette packet and, for the reasons I've set out, are unlikely to be accurate, especially so soon after the events.
The other sorts of figures that you will see are the amounts that insurers expect to have to pay out. These are sketchy at first and become more accurate over the coming weeks as claims start to come in.
But all of these figures ignore the misery.
In recent weeks we've seen people who had only just fixed up their homes from the previous floods having to come to terms with fresh damage.
We've seen people who have just bought their first homes watching helplessly as they are inundated.
Even if we were only considering hard, economic effects, these people's productivity must be affected by the floods and the time it takes to fix their homes. This is not to mention the thousands of people who have been evacuated from their homes even if there has not been any eventual damage.
The Office for National Statistics now tries to measure wellbeing. Perhaps the floods and the months of wet weather will have an impact on that measurement.
Don't expect to see a huge impact on GDP figures from the flooding though.
Bank of England governor Mark Carney says he expects to see an initial hit to GDP, which will then recover as repairs are carried out.
Former Bank of England economist, Rob Wood, now working for Berenberg Bank, sums this up by predicting floods will knock 0.2 percentage points off GDP in the first quarter and add 0.2 percentage points to the second quarter.
But don't be fooled into thinking that means that the floods have had a negligible effect on the economy.