Australia started 2011 with a tract of territory larger than Germany and France combined under water. Initially, before deaths started being reported in the worst flooding Australia has seen for decades, the concern was damage to property and infrastructure. Without a doubt the bill for this event will be in the billions of dollars, particularly since the flood waters have hit central Brisbane, one of Australia’s major cities. With the death toll rising all the time, concern has shifted to people rather than property and one shudders to think what would have happened if fast flowing floodwater on this scale had hit one of the more crowded EU states.
Australia as a country is bigger than Europeans can easily comprehend so despite the vast area involved, this is still classified as a “local” flood. This is not to minimise the very real misery for those who have been caught up in the flooding and whose houses and possessions are now ruined by evil smelling flood slime and water damage. The number of citizens flooded out and forced to seek refuge in temporary shelters in school halls, village halls and community centres was, at the time of writing, rising all the time, which brings us to the potential impact, not just on Australia, but on the world economy.
Important to this will be the fact that Queensland is Australia’s major centre for the mining of coking coal and the country provides around 54% of global exports of coking coal (used in steel making) and a significant portion of the world’s thermal coal requirements (used in power generation). According to Matthew Gertken, an analyst with the geopolitical analysis house, Stratfor,
"The flooding in Northern Queensland will hit between 10% and 20% of Australia’s output and spot prices for coal have already moved up $10."
The three countries which Gertken points to as most likely to be hit by the tightening in the supply of coking coal, are Japan, Taiwan and South Korea, all of which import around 100% of their requirements, mostly from Australia. Supply tightness could also impact China, he suggests, even though China currently only imports around 5% of its requirements. However, that 5% plays an important part in helping China to balance its distribution, and imbalances in distribution hammer power generation, which could have a serious knock on effect on industrial production.
Bloomberg cites Reserve Bank of Australia (RBA) board member Donald McGauchie’s comment that the floods could have a “significant impact” on the country’s exports generally. “On what can be seen at the moment, there is very substantial damage to infrastructure,” McGauchie said.
Queensland as a whole accounts for some 20% of Australia’s GDP (US$1.29 trillion). The bill for the flooding, when it is finally added up, could come to more than $3 billion. There will be some positives for the economy as the country sets about rebuilding damaged infrastructure in Queensland, but McGauchie fears that skills shortages and capacity constraints could lead to some inflationary pressures once reconstruction work begins.
Before the floods happened, most analysts were predicting a fairly bouyant 2011 for Australia, and the fundamentals that they were basing their predictions on are still very much in place. Morgan Stanley points out that Australia goes into 2011 following a rattling good year in 2010 in which the Australian dollar finally achieved parity with the US dollar, a huge source of pride for Aussies, even though a strong Australian dollar does not exactly help firms trying to win export business in the US. The Australian economy tore away in 2010 with the RBA having to repeatedly slam on the brakes, four times to be precise, by hiking up interest rates to try to damp down the inflationary tendencies being stoked up by all that growth.
As a largely commodity economy, Australia benefited hugely from the surge in commodity prices through 2010 and that trend looks set to continue through 2011 and for some years to come. Australia also looks set to benefit from the fact that its major trading partner, China, is on course for growth of between 8% and 10% for 2011, and even if the Chinese Government itself goes in for some tightening to try to squash down some inflationary worries of its own, China’s demand for imports looks like something that Australia can take to the bank.
According to the IMF’s most recent report on Australia, released at the end of October 2010, Australia never did quite succumb to the global recession in 2009 and the IMF expects 2010 growth to come in at between 3% and 3.5%, with much the same for 2011. The chief downside risks lie with the possibility of global growth stalling, China over-tightening (which would be one reason why global growth would grind to a halt) and some kind of turbulence in the local or international financial system which would push up the cost of capital. There is also the possibility of domestic travails as Aussie consumers stuggle to service their debts amid warnings of a delayed housing market bubble burst. Writing in Business Insider, economic forecaster Mike “Mish” Shedlock predicted that:
"Australia faces an economic crunch as family finances collapse under the burden of record debts, rising interest rates and utility bills.
None of these risks look particularly threatening at the start of 2011 and the country is enjoying an absolute boom in demand for its commodities. The IMF in fact flagged up an “upside risk” associated with this boom, namely that it could have “a larger than expected impact on output and inflation”. Australia plans to run a budget surplus by 2013 at the latest, but as the IMF points out, it could easily slacken back on this and run a slightly looser fiscal policy without undue risk if growth looked unduly impacted. All in all, a report card that any European country would die for…
Further information on the Australian economy, commodities and exporting:
- Essentials for Export Success: Understanding How Risks and Relationships Lead to Rewards, by Paul Beretz
- How to Rescue the World Economy from Disaster, by Roger Bootle
- Globalization, Challenges and Threats—Where Will the WTO and Free Trade Go? by Mike Moore
- To Hedge or Not to Hedge, by Steve Robinson
Tags: Australia , China , commodities , exports , floods , Queensland