Modelling physical climate risk: Assessing UK flood risk and economic impacts
By Jillian Brugger and Ronan Hegarty
Flooding is one of the most significant physical climate risks facing the UK, posing a significant threat to every UK county under both moderate and extreme climate scenarios. Its economic impacts are highly localised, with the severity of damages reflecting the geographic and economic characteristics of affected regions. By harnessing Oxford Economics’ novel geospatial techniques alongside our Global Economic Model (GEM), we can assess how economic activity at both a regional and national level are impacted by localised flood risk. This blog summarises the findings from our recent Research Briefing that examines the economic consequences of a 1-in-200-year flood event in London and across the UK.
Hyperlocal analysis of flood risks
Our analysis of flood risk leverages geospatial and national accounts data to join three components of risk modelling: river flood risk assessments, economic exposure using hyperlocal GVA estimates, and a damage function to translate physical impacts into economic costs. Combining these three distinct elements provides ultra granular estimates of flood damage at a 250 m2 resolution. At this scale, we can assess the unique damages to the sectors.
Real estate sector particularly vulnerable to flood risk in London
Central to determining exposure to flood risk is capturing both the scale of economic activity and the sectoral composition in a given location. By understanding how economic activity is distributed across space, we can estimate the differing sectoral exposures to flood risk. For example, industries such as real estate and construction are highly exposed as their production and underlying value is reliant on physical assets. Conversely, service sectors such as IT and financial services are relatively insulated from flood risks, as work in these sectors can continue with limited in-person activity.
These differing sectoral vulnerabilities play an important role in shaping London’s exposure to flood risk. For a 1–in–200-year flooding event, 22 of the city’s 33 boroughs can expect real estate to be their most vulnerable sector. For example, we find that Richmond upon Thames would see the most significant damage in the real estate sector, with nearly £650 million in real estate GVA at risk from extreme flooding, largely due to higher house prices and exceptionally deep flood inundation. However, London’s diversified and serviced based economy helps cushion the economic impact of flooding. London boroughs with high shares of economic activity in service sectors, such as Southwark and Tower Hamlets, are therefore likely to be more resilient in the face of flooding.
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The macroeconomic implications of flood damage
Beyond local- and sector-specific impacts, an acute flood event would have substantial macroeconomic effects, particularly when concentrated in a key metropolitan area or economic centre, such as London. To assess the impacts on the wider economy, we have used our hyperlocal estimates of localised flood risks as inputs into Oxford Economics’ GEM, with shocks calibrated based on studies found in the economic literature. The results underline the pronounced aggregate implications of flooding. Namely, GDP falls by 1.3% below baseline immediately after the flood, before eventually converging to baseline. This reflects both supply side and demand side mechanisms. On the demand side, higher short-term inflation coupled with higher unemployment depresses demand, feeding through to lower GDP. On the supply side, we forecast that the capital stock will trough at 0.7% below baseline following the flood, as physical assets—such as roads, railways, and utilities—are damaged or destroyed.
At a first glance, the impact of flooding on inflation is ambiguous; the presence of both supply and demand forces have offsetting impacts. Our modelling suggests that there would be a brief, short-run inflationary impact after the flood, in line with a supply side impact, before aggregate demand channels begin to dominate, pushing inflation below baseline. This demand side mechanism also materialises in the context of house prices. Namely, our modelling shows house prices fall immediately after a flood, reflecting weaker demand and lower property values from physical damages.
What this means for you and your business?
The intensification of physical climate risks is leading to stronger corporate reporting recommendations as well as greater regulatory scrutiny regarding exposures to natural disasters.
At Oxford Economics, our analysis harnesses both geospatial and macroeconomic modelling to provide a holistic assessment of physical risk exposures and damages, which can serve as a key guide for corporate and financial institutions in understanding their vulnerability to physical climate risks, now and in the future.
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