Sizing up the economic impact of Australian floods

The Treasurer of Queensland, Andrew Fraser, estimated the total damage of the floods would be in the “billions of dollars.”

Warwick McKibbin, a board member of the Reserve Bank of Australia, told the Sydney Morning Herald newspaper that the country’s GDP may be reduced by up to 1 percent [or almost U.S.$12.7-billion] in 2011 due solely to the floods.

If you look at the infrastructure damage and all the networks that have been broken, a hit to the economy of 1 percent is not out of the question, Warwick McKibbin said.

Others are expecting somewhat less of an impact.

Savanth Sebastian, an economist at Commonwealth Securities, an Australian broker, forecast that the country’s first quarter GDP would be cut by 0.2 of a percent, although he added that the overall impact on the broader economy was ''still looking quite small''.

Nomura Australia expects losses arising from the flood to remove about 0.35 percentage points from Australia’s 2011 GDP growth, mostly concentrated in the first quarter.

Ben Jarman, an economist at JPMorgan, said that Australia’s trade balance would likely suffer a temporary weakening early in the year following the floods.

Beyond Australia, the flooding will surely reduce the global supply of coking coal (a key ingredient in steel manufacturing), thereby boosting prices in world markets.

''The flooding has left many coalmines underwater and it is unclear how long it will take for production to come back on line,'' Jarman said.

Australian exports of wheat will also be negatively impacted; again, lifting prices of the commodity on global markets.

Economists at Bank of America/Merrill Lynch (BoAML) have reduced their 2011 GDP growth forecast to 3.3 percent from 3.0 percent; and hiked their CPI forecast to 3.5 percent from 3.1 percent.

The floods are more a supply than demand event, BoAML said,

On the brighter side, some economists point out that although the flooding will likely hurt first-quarter GDP figures, once the flooding recedes, Queensland will likely embark on a significant program of rebuilding and repairing damaged infrastructure, hence adding to economic growth and unemployment as the year progresses.

Indeed, Nomura added that ''But [the floods] will be followed by reconstruction and government financial assistance, so the net impact on Australia's 2011 GDP growth should be minimal.

The reconstruction effort is looking set to be larger and larger and could make a significant contribution to growth as early as the second quarter, said Michael Workman, senior economist at Commonwealth Bank.

Coal exports should also rebound strongly and prices are much higher now with supply constrained.The boost from the terms of trade should be very powerful.