British Columbia wildfires
iStock.com / Mooneydriver

The economic costs of extreme weather events in Canada are on the rise, and they go beyond the immediate short-term effects of property damage — policymakers need to take a more proactive approach to curbing these risks, and enhancing economic resilience, RBC Economics suggests.

In a new report, a couple of the bank’s economists note that natural disasters — events such as wildfires, damaging storms, and floods — are becoming more frequent, and financially significant.

For instance, it reports that seven of the top 10 years for insured losses have occurred in just the last 10 years, topped by the record $8.5 billion worth of losses that were incurred in 2024, thanks to a major hailstorm and wildfires in Alberta, a hurricane in Quebec, and flooding in Ontario.

These kinds of natural disasters are no longer unusual, and are becoming increasingly frequent and financially burdensome, it said.

“The annual average cost of natural disasters soared to $1.5 billion between 2009 and 2019 — compared to only $600 million in the previous decade — a clear indication of escalating economic risk,” it noted.

While the direct costs of these events are rising, so too are the longer-term impacts on productivity. From an economic perspective, these kinds of events follow a predictable pattern, the report said.

“Natural disasters cause significant disruption to economic activity, but are followed by a quick bounce back as activity restarts and rebuilding begins,” it said.

Indeed, GDP and employment often gets a short-term boost from a surge in construction spending that follows a natural disaster.

“However, this short-term economic bounce back can be deceptive,” the report cautioned — as reconstruction efforts typically involve rebuilding lost assets, which displaces productive investment in new assets.

“The shift of resources towards reconstruction means less production resources are available for investments like technological upgrades or expanding the capital stock,” it said.

Similarly, while this activity also boosts short-term employment, “replacing what was lost typically has less impact on future productivity growth versus those resources being used on new investments,” it noted. “Therefore, funds used for recovery represent lost opportunities to invest in innovation or research and development, which are vital for sustainable economic growth.”

For example, the $5-billion cost of natural disasters in 2016, primarily the Fort McMurray wildfire, “represented roughly 14% of the nation’s R&D spending that year and diverted resources from future productivity and innovation,” the report said.

Additionally, there are other financial repercussions from frequent natural disasters, it noted — such as localized economic disruptions to the Alberta energy industry for instance, that spill over to global commodity markets.

Rising insurance payouts are also driving higher insurance premiums, which represents a “growing financial burden on households and businesses,” it said. It noted that “homeowners’ insurance premiums have increased by 5% per year on average over the last two decades — more than twice the 2% average inflation rate.”

Given the rising economic and financial challenge, the report argues that the approach to coping with natural disasters needs to shift from reconstruction to enhancing long-term resilience.

“Proactive investments in mitigation, such as improved forest management practices, can significantly reduce future disaster costs and severity. These prevention strategies are more cost-effective than post-disaster recovery, and also help stabilize insurance premiums and secure local economies against recurring shocks,” the report said.

Moreover, efforts to diversify narrowly focused regional economies can reduce their vulnerability to disruptive weather events.

“By channelling resources into resilient infrastructure, innovation-oriented policies, and proactive disaster prevention measures, Canada can create a robust economic environment that is less susceptible to the cyclic nature of rebuilding destroyed assets, and more geared towards investing in new growth drivers,” it concluded.