The AMP’s chief economist, Dr Shane Oliver takes a look at the impact of the floods on the Australian economy.
Two years ago it was fires ravaging parts of Australia with devastating consequences.
Now it’s floods, with most states being affected. Even Tasmania, where I spent last week on holiday, was affected with Railton in the State’s north-west copping it a day or so after I passed through it.
However, so far it’s Queensland that has been hit the hardest with an area the size of Germany and France going underwater and Brisbane seeing its worst flood since 1974.
Unfortunately the crisis is not over with almost one third of Victoria now flood affected.
Like the fires of two years ago the floods have wrought terrible tragedy in terms of loss of life and disruption to people’s lives.
Beyond the human suffering there will also be significant implications for the Australian economy and investment markets.
There will be three key economic impacts from the floods: the obvious damage to wealth and associated repair and rebuilding costs; the impact on production or GDP growth; and the impact on inflation.
Damage from the floods
Getting a clear handle on the damage bill from the floods is obviously difficult with flooding continuing in many areas.
However, there is no doubt that it will be immense:
- Assuming that 40,000 houses suffered partial or total inundation with an average repair cost of $50,000 implies a total repair bill for damaged housing of around $2bn;
- Damage to commercial property, mines, farming equipment etc could amount to another $2bn;
- Given the extent of the flooding, damage to public infrastructure such as roads, railways, bridges, electricity and water supply, etc, could easily top $10bn to repair.
E.g., the Queensland Roads minister has already estimated $1.5bn worth of damage to state controlled roads.
However given that the state only controls 20% of Queensland roads the total damage bill for Queensland roads will be well in excess of this.
This suggests a total damage bill of around $15bn, which is similar to the damage caused by the 1989 Newcastle earthquake of around $13bn in today’s prices and Cyclone Tracy in Darwin in 1974 which caused around $15.5bn of damage in today’s prices.
As rebuilding and reconstruction commences it will provide a boost to economic activity, but this is unlikely to become evident until the June quarter at the earliest and it will be spread over several years.
Much of this repair bill will fall to Federal and state budgets and to a lesser degree insurance companies and individuals.
Fortunately, Australia’s relatively low level of public debt means that Australian governments are well placed to cover the bill.
Net public debt in Australia is near zero in contrast to many other OECD countries where it is at exorbitant levels.
So even if Federal and State governments have to run up extra debt of $13bn or 1% of GDP, it is not a major financial concern.
A negative supply shock – the worst kind
Physical crises like floods initially amount to negative supply shocks as they cut into an economy’s ability to produce.
This is the worst kind of shock as it reduces economic activity at the same time that it adds to inflation.
In terms of the impact on economic activity the major negative impact will come from the following:
- Lost coal production – Queensland normally exports about $2.8bn worth of coal a month.
It’s estimated that $2.3bn of coal sales has already been lost.
With only 15% of its coal mines operating at full capacity due flooding or lack of transport and likely to take 3-6 weeks and possibly months in some cases to get back to normal it’s likely that coal exports will be reduced, possibly by around $5bn spread over December to February.
This is equivalent to around 0.4% of annual GDP alone;
- Reduced agricultural production – particularly in terms of fruit and vegetable production, sugar cane, cotton and to a lesser extent wheat and meat.
This could amount to another 0.1% to 0.2% knocked off GDP;
- Reduced activity mainly in tourism, transport and retailing due to disruption caused by the floods could easily knock another 0.4% off GDP.
A 5.7% nationwide fall in consumer confidence in January, presumably largely due to the blanket coverage of the floods, suggests that the short term hit to retailing might extend beyond just flood affected areas;
- The disruptive effects associated with floods may also result in a delay to the start-up of some mining related projects.
So overall economic activity could be reduced by around 1% with a part of this showing up in the December quarter last year, but the bulk of the impact, around 0.8%, occurring in the current quarter.
As such there is a chance that March quarter GDP growth could actually be negative.
However, the net impact on GDP from the floods is likely to be less because rebuilding and reconstruction will start to provide a boost to economic activity from the June quarter.
By year end it’s likely rebuilding and reconstruction will have resulted in a 0.5% boost to GDP, and as a result the net impact on GDP growth this year will be of the order of minus 0.5%.
In other words r
