The Reserve Bank says the floods and cyclone Yasi will have an impact on the country’s economic performance in 2011 and 2012.
But the impact will be temporary and the RBA is maintaining its closer scrutiny of the economic data to see how underlying inflation is travelling and if there are any signs of a wages break out and increased competition for resources.
But for the moment it remains happy that inflation is better than expected and that other worry points are not showing up.
The RBA’s overview for Friday’s Statement of Monetary Policy is in fact a useful primer of the factors influencing the economy at the moment and corporate earnings.
These include the impact of the floods and cyclones, the resources boom, the high level of savings and consumer reluctance to spend, plus the impact of the stronger Australian dollar. All will be factors touched on by many companies in their comments in their 2011 interim and full year reports.
Hardly a sector of the Australian economy or the market will have been spared, except, for the moment, the still booming WA iron ore industry, which is dominated by Rio Tinto and BHP Billiton.
The RBA said Yasi’s impact on the economy was too recent for an assessment to be made, but the bank says the flooding in Queensland and Victoria could cut growth in 2011, concentrated in the six months from October 2010 to March 2011.
"These recent extreme weather events have damaged parts of the capital stock in the affected regions and disrupted production, with the biggest effect on GDP likely to arise from swings in coal production, the Bank said in Friday’s Statement of Monetary Policy, the first of the four for the year.
"While the full extent of the disruption and damage is not yet known, the Bank’s preliminary estimate (made prior to an assessment of the impact of Cyclone Yasi) is that the level of output in 2010/11 as a whole will be around ½ per cent lower than would otherwise have been the case, with most of the negative effect in the December and March quarters.
"The pace of the recovery will vary by industry and region but the overall level of GDP in the June quarter is likely to be back close to the level it would have been in the absence of the floods.
"This assessment assumes that there are no substantial economic effects of further extreme weather events.
"Following the June quarter, rebuilding efforts are expected to add modestly to aggregate demand, with the exact size of the boost depending on the extent of the damage, the speed of rebuilding and the extent to which other private and public spending is deferred."
"The Bank’s central forecast for the economy over the next few years is largely unchanged from the November Statement.
"However, as noted above, the recent floods will have a material effect on the near-term profile of GDP, with growth in the December and March quarters notably lower than would otherwise have been the case, followed by a strong recovery in the June quarter as coal production picks up and the rebuilding effort gets under way.
"Over the four quarters to December 2011, GDP is expected to increase by 4¼ per cent. (see the table at the bottom of story)
"This is higher than was expected at the time of the November Statement, but this revision reflects the lower starting point as a result of the flooding in December 2010.
"Beyond 2011, GDP is forecast to grow by 3¾–4 per cent.
"This medium-term outlook continues to reflect the expected strong growth in mining investment and high commodity prices, which have been providing a substantial boost to incomes in Australia.
"With GDP growth expected to be above trend over much of the forecast horizon, pressures on capacity are likely to emerge in parts of the economy as the structural adjustment to the large change in relative prices takes place.
"The substantial increase in the price of Australia’s exports has meant that the real exchange rate is higher than it would otherwise have been, and this is contributing to differences in growth prospects across industries.
"The near-term forecast for year-ended underlying inflation has been revised down a little since November, reflecting the base effects of the recent outcome.
"While the exchange rate appreciation and soft retail spending are expected to continue to place downward pressure on the prices of many consumer durables, the floods have temporarily boosted the prices of some commodities.
"In terms of headline inflation, the floods are expected to add around ¼ percentage point to CPI inflation in the March quarter – mainly through higher fruit and vegetable prices – with much of this being reversed in the following quarter.
"Some additional effects can also be expected from Cyclone Yasi, but at the time of writing not enough information was available to quantify these.
"The medium-term outlook for inflation is broadly unchanged. In underlying terms, inflation is expected to be around 2½ per cent later in 2011, before picking up gradually to 3 per cent by late 2012.
"In the next few quarters, year-ended CPI inflation is likely to remain above underlying inflation, largely due to the effects of the earlier increase in tobacco excise and significant increase
