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Australia: Of drought and flooding rains: The export impact of natural disasters

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Tim Harcourt

Chief Economist

Australian Trade Commission

Sydney

Email: tim.harcourt@austrade.gov.au

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23 February 2011

With harsh floods in Queensland and Victoria, followed by cyclones in far north Queensland and across northern Australia along with the bush fires in Western Australia, we were reminded this summer what a harsh climate we live in on this vast continent. Of course, we saw the best of Australia too, with community spirit and generosity in abundance ensuring that those hit worst by the tragedy got immediate support. The social cohesion of Australia was at its best along with our ability to organise the logistics of a swift emergency response.

But there is now the economics to consider and how these natural disasters will affect our export sector. Fortunately the Reserve Bank of Australia (RBA) and several market economists have looked carefully at the issue. In their early analysis of the economic outlook for the Australian economy, the RBA has naturally been focussed on both global events and on the impact of the floods in Queensland and Victoria and the impact of Cyclone Yasi in North Queensland. The RBA's view was that whilst the floods have obviously disrupted Queensland's vital resources, agriculture and tourism export sectors on the supply side, the effects are short term and the rebuilding effort will add to GDP growth in the medium term (see chart). However, the short term effects are significant with GDP growth in the December and March quarters being at least ½ a percentage point lower than they would have been. The RBA also estimates that the disruptions alone took ¾ of a percentage point off growth in the March quarter alone. These estimates were undertaken before the impact of Cyclone Yasi were assessed.

Market economists have also predicted sizeable short term impacts of the floods on key export sectors in Queensland. For example, IBIS World predicts that mining sector revenue will be reduced by $2.5 billion compared to what it would have been in 2010-11 (as Queensland accounts for 60 per cent of Australia's coking coal exports) and $1.6 billion of crops have been destroyed (with major losses in wheat, sugarcane, fruit and vegetables) over the period. Of course Queensland's vulnerable tourism sector is estimated to be cut by $590 million or 0.7 per cent of total revenue, which was already expected to be flat at $84.2 billion in 2010-11. In addition, there would be associated impacts on Transport, LNG/Coal Seam Gas, utilities and services and the re-construction effort is estimated to cost $10 billion over the next 30 months by IBIS World.

However, whilst the short term export impact is substantial, the long term causes boosting the Australian and Queensland economies - the strong demand for resource exports from China and India - will still overshadow the short term impact of the floods on our exports. The inability to supply coal exports will correct over time as production capacity is rebuilt and the impact on food prices is likely to be temporary (as we also saw with Cyclone Larry and similar natural disasters). Ultimately, the strength of the global resources boom and the fundamental strength of the Australian economy - across both resources and non-resources sectors - will enable us to see through the worst impacts of the natural disasters on our exports, even though there has been a lot economic and social pain inflicted on the worst affected communities.

And as for economic forecasters, when I was at university, Economics/Law was considered the combined degree that would be most useful in the commercial and policy worlds. It now might be wise to enrol in a combined Economics/Meteorology degree in today's environment given the economic impact of out continent's fragile climate. And I am sure the RBA now takes a closer watch on the Bureau of Meteorology's analysis than ever before!