Dual Threats: COVID and Climate Change

by Admit Madaan, Michael Kent of BlackRock, 6/1/20

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.