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15/01/2011 | Mother Nature Takes Cruel Swipe At Australia's Economy

Global Insight Staff

Flooding in Queensland has wreaked havoc on the country's infrastructure and key industries, thus ruling out an upgrade to the country's growth forecast for 2011.

 

IHS Global Insight Perspective

 

Significance

Some of the worst flooding in decades has hit the state of Queensland hard, washing away homes, lives, as well as much of the state's economic potential for early 2011.

Implications

Australia was due to have its growth forecasts upgraded for 2011 based on improving economic outlooks in the United States and China which would have boosted export potential for the year, but the floods have dampened prospects for roughly one-fifth of the nation's economy.

Outlook

IHS Global Insight's January forecast calls for real GDP growth of 2.5% for 2011. This forecast is an early estimate, as we do not know the full damage that has been done thus far by the flooding. There is a significant risk that flooding could continue on and off for the next few months, which could result in further downgrades to our forecasts.

Mother Nature's Cruel Joke: From One Extreme to Another

After suffering from a protracted and devastating drought until 2009, Queensland experienced its wettest spring on record in 2010. The rainfall is being boosted by the La Niña weather pattern which is expected to continue to support heavier rainfalls in much of Australia through March. The issue was exacerbated by Tropical Cyclone Tasha, which hit Queensland on 25 December and unleashed heavy flooding in the state. The flooding has destroyed standing crops, flooded coal mines, washed away infrastructure, and has caused significant property damage. The ongoing rain is a risk for the country's economic outlook as well as for much of its already waterlogged infrastructure.

Rising Waters Hit Mines and Infrastructure

The flooding has had a major impact on Queensland's infrastructure, including the network of rail lines and ports that serve the state's massive coal industry. Australia provides almost two-thirds of the world's metallurgical coal, 90% of which comes from Queensland's mines and leaves the country via its ports. The ANZ Bank estimates that flood-related outages represent 41% of the world's metallurgical coal exports and 8% of its thermal coal exports. These outages are the result of floods hitting both the mines themselves, with over 40 mines having suspended operations, and the supporting rail and port infrastructure, in particular the closures of the Blackwater rail system and the port of Brisbane.

The majority of mining operations in Queensland are open-cut pits, making them particularly vulnerable to flooding. The government has softened environmental regulations relating to the rate at which water can be pumped from mines but there are already reports that pumps used to drain water from the mines are in short supply, with experts estimating that the clean up could take around three months. While the impact on the coal export infrastructure has been extensive, the worst-case scenarios have been avoided and the supporting infrastructure is expected to recover quicker than the mines themselves. The highest capacity rail system, the Goonyella line, has recovered from a derailment that saw it closed from 24-30 December and is now operational albeit at around 70% capacity. Similarly, the coal terminals at Dalrymple Bay and Hay Point, which together export around 99.5 million tonnes of coal a year, have remained operational at around 60% capacity.

Other parts of the system have been harder hit. Brisbane's port remains closed to all commercial shipping due to flood-related currents and debris in the water. Today the port authority indicated that it was aiming to see the movement of priority shipping on a limited basis on Sunday (16 January). In contrast, while the port of Gladstone was largely unaffected by the flooding, exports have instead been hit by problems with the Blackwater and Moura rail systems. Gladstone has a yearly capacity of 69 million tonnes of coal and in an average week exports around 1.3 million tonnes. However, by Wednesday (12 January) the port had not received any coal supplies since early in the week commencing 3 January. Exports will resume tomorrow, following the reopening of the Moura-Dawson line yesterday. The Blackwater system remains closed, with rail tracks under water in some places. Nevertheless the damage to the line is not as significant as first thought and Queensland Rail has indicated that some service will be available on the line as early as 20 January, which will further increase exports from Gladstone.

The disruptions have led to delays in turnaround at ports and a decline in the number of visiting vessels. There are currently eight ships ready to take exports at anchor at Gladstone. Yesterday, 43 ships were waiting outside Dalrymple Bay, down from the 2010 daily average of 52 vessels. At both ports vessels have been left waiting for up to 50 days, around four times the average turnaround. Overall, it was reported today that more than 100 bulk carriers are waiting off the Queensland coast with turnaround times now reaching 22 days. Further delays and reduced coal shipments could potentially lead to a situation where ships are redirected elsewhere.

As well as providing metallurgical coal for export, Queensland's mines also provide thermal coal for its power stations. On 12 January Stephen Robertson, Minister of Energy in the Queensland state government, confirmed that the plants had sufficient coal to continue operation and that the situation "is not expected to change". Nevertheless, there have been power outages, some pre-emptive, in flooded areas and there is likely to have been extensive damage to the electricity distribution system. Today Energex reported that it had cut power to 127,000 customers across southern Queensland, as rising waters made the company's infrastructure unsafe.

What Impact Does Flooding Have on Australia's Economy and Our Forecasts?

IHS Global Insight had been looking to upgrade our 2011 GDP forecasts for Australia. We have been bearish on Australia's economic prospects in 2011 owing to concerns about the potential for slowing demand for Australian goods as economic activity and demand in Asia has been expected to moderate. Further, unwinding of fiscal and monetary stimulus measures and anticipated weakness in household consumption have also held back our forecasts for 2011. It appears, however, that things have started to pick up in the United States and many other countries in recent months, which has led to an upgrade to IHS Global Insight's growth forecasts for a number of countries in January. The cumulative effect of the upgrades would have boosted Australia's real GDP growth figure for 2011 by around 0.2 percentage point for the year from the December forecast value of 2.5% to 2.7% as export demand picked up. Unfortunately the economic impact of the floods is currently expected to reduce Australian growth by roughly the same amount, 0.2 percentage point, and as such our growth forecast remains unchanged at 2.5% growth for 2011. The reduction in growth caused by the floods is centred largely on the effects of the flooding in Queensland, but significant rainfall in other parts of Eastern Australia is also noted. For some perspective, the state of Queensland accounts for 19% of total Australian output, around 22% of total merchandise exports, and is a major centre for tourism in the country with the Gold Coast, Sunshine Coast and the Great Barrier Reef being among key attractions.

Share of GDP and Exports in Australia's Regions

Region

Share of GDP (%)

Share of Merchandise Exports (%)

New South Wales

31.7

15.5

Victoria

23.5

9.2

Queensland

19.0

21.5

Western Australia

14.4

41.5

South Australia

6.3

4.1

Australian Capital Territory

2.2

0.0

Tasmania

1.8

1.5

Northern Territory

1.3

2.5

There will be lost export potential from Queensland as over a dozen coal mines remain under force majeure, and significant damage has been done to the state's sugar and cotton crops. Nonetheless, in the January forecast we have marginally upgraded our forecasts for real exports of goods and services from annual growth of 0.5% to 0.7%. This is based on expected stronger demand from China, the United States and other Asian economies which will be met by other states during the first half of 2011, before Queensland exports gradually recover. Exports from Queensland's mining sector are likely to recover ahead of the agricultural sector owing to the loss of crops that remained in the fields and the inability to carry out planting of certain crops to support next year's harvest. Depending on the amount of flooding that reaches the coast, and how stormy the region is during the coming months, tourist arrivals could require extra time to recover as well. Other areas of the forecast that have seen upgrades in January are our figures for real imports, fixed capital formation, and a mild increase in government spending which were all related to the anticipated reconstruction and recovery activities. Also worth noting in the January forecast update is that we have downgraded our forecasts for real private final consumption expenditure from 2.5% to 2.3%. This is in part a result of the floods which will cause significant losses of disposable income and wealth for residents, but also because consumers are proving to be extremely conscious of their spending and savings habits owing to the threat of looming interest rate hikes.

Inflation concerns have been highlighted for Queensland, especially as shortages of food, bottled water, and supplies will occur periodically. The loss of standing crops, in particular vegetables and fruit, will also drive up inflation in the region. Inflationary pressures will also build in the near term as reconstruction activities get underway, as they will push up demand for construction materials and potentially increase skilled labour shortages. Our January forecast calls for average consumer price inflation of 2.7% in Australia during 2011, up from 2.6% previously. On the monetary policy front the flooding will keep the Reserve Bank of Australia (RBA) on the sidelines for a while as long as inflation expectations remain under control. We now see the RBA next raising the leading interest rate by 25 basis points in both May and June to catch up with lag caused by evaluating the flood damage.

Outlook and Implications

As large swathes of Queensland remain inundated, some preliminary estimates of damages and losses are slowly emerging, but it could be months before accurate estimates are produced. The January forecast therefore is an early snapshot of the economic damage done to Australia by Mother Nature. Owing to the La Niña weather pattern and the fact that this is usually the rainiest time of year for Queensland there is a risk that the heavy rains and flooding could continue and more severely hamper economic activity in the country. The recovery is likely to be long, hard and not to mention costly for the people and companies in Queensland, but exactly how costly will not be known until the floodwaters recede.

Global Insight (Reino Unido)

 



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