KEY POINTS:
Coverage of the floods that have submerged tracts of England has been endless. But Britons absorbing tales of loss from the comfort of a dry armchair are mistaken in thinking they have escaped the deluge. Experts expect the total bill to exceed £6 billion ($15.80 billion), while economists believe the murky waters will soon seep into homes nationwide in the form of higher food bills.
The torrential downpours and freak floods have left some farmers facing bankruptcy as hundreds of thousands of hectares of crops go unharvested.
Now economists are monitoring whether the financial aftershocks will stoke inflation and, as a consequence, provoke a further rise in interest rates.
Rising inflation has provoked Bank of England decision-makers to raise interest rates five times in the past 12 months. Economists are harking back to the autumn of 2000, when some parts of Britain experienced the heaviest rains in 270 years, to project the likely effects on the rest of the country. Within six months, seasonal food prices had shot up 9 per cent.
"The floods are not expected to damage overall economic growth but there is a big issue of food price inflation," says Ian Kernohan, economist at Royal London Asset Management. "It is already quite high in the United Kingdom due to global factors such as rising wheat prices."
Higher living standards in China and India have increased global demand for meat and milk, and while consumer price inflation fell back to 2.4 per cent in June, food price inflation was double that.
This has been exacerbated by severe drought in Australia and the United States and a growing trend for farmers to grow crops for fuel instead of food.
The areas most affected - Yorkshire, Lincolnshire, Worcestershire, Herefordshire, Gloucestershire, Warwickshire and Oxfordshire - account for about 6 per cent of the UK's agricultural economy.
Consumers have enjoyed a period of relatively cheap food, with the share of household expenditure on food less than half what it was 40 years ago. Now, experts are suggesting the cost of some vegetables could rise by as much as 10 per cent.
"It remains to be seen whether retailers will try and absorb increases or pass them on to customers," adds Kernohan.
The National Farmers' Union says it is "too early" to quantify the overall damage to crops and, unlike sodden carpets and sofas, they are not insured.
"We have had 700 claims for buildings and plant so far," says Tim Price, spokesman for NFU Mutual, which insures two-thirds of British farmers.
"But in the UK, crop insurance has never been widely available because the main risk is weather. The price of good quality crops was rising as farmers were already finding it difficult to harvest in the wet weather."
Peas and potatoes have been worst hit, with the wet and humid conditions also incubating the worst case of potato blight since the 1940s.
The knock-on effect is expected to continue into next year because farmers have been unable to plant autumn crops such as cabbage, broccoli or sprouts.
Economists estimate the cost to the affected regions, in terms of productivity such as missed working days and lost tourism, will add up to about £3.2 billion.
This is considered small fry in the context of Britain's expected GDP of about £1.25 trillion but not by the big insurers preparing to write £3 billion worth of cheques to fund the clean-up of homes and businesses.
For them, this is the most severe natural catastrophe since the storm of 1990, when hurricane-force winds swept the country, costing the sector £2.2 billion. They are mobilising claims officers, many of whom are still bogged down in paperwork from last month's floods in Yorkshire.
The £3 billion price tag is more than three times the normal level for weather-related claims and the industry is increasingly vocal about the need for the Government to step up spending on flood defences, especially if Prime Minister Gordon Brown's vision of building three million homes by 2020 is to be realised.
The Association of British Insurers estimates that about 10 per cent of UK homes are at risk from coastal or inland flooding but, unlike other European countries, the Government does not meet claims that arise from it.
So far this summer about 35,500 homes and 8500 businesses have been affected; a number that is likely to rise.
The cost of picking up the pieces is widely expected to be handed on in the form of higher renewal premiums but, unless the Government pledges serious investment in flood defences, ratings agency Fitch says there is a risk insurers may walk away. That would leave prospective buyers unable to get the insurance required to secure a mortgage while, post-flood, homeowners could face negative equity.
Property website Rightmove said until now homes prone to flooding were a small, easily identified sector, whose owners were aware of the risks.
"The recent flooding has affected far more properties," says Miles Shipside, Rightmove's commercial director.
"This will deter future purchasers unless they can be assured it will be unlikely to recur and have a negative effect on value."
Some houses in Kent took two years to recover lost value after the 2000 floods and Richard Lee, an Oxford-based associate at estate agent Cluttons, says property prices could fall by up to 15 per cent in the city: "We had flooding in 2003 but not as severe as this and, as a result, some buyers got worried and withdrew. Prices could be affected by 10 to 15 per cent over the next 18 months."
Insurer Royal and Sun Alliance is adamant that it will not keep mopping up if the Government fails to defend the nation's housing stock.
"Some flooded areas are not normal flood-risk areas," says Jon Sellors, spokesman for RSA, which is paying out £53 million of the £1.5 billion claims from the June floods.
"The Government seems hell-bent on building three million new houses and that will involve flood plains. That will put pressure on the industry to only insure those that are well protected.
- " OBSERVER
