Northeastern Australia’s worst floods in half a century are likely to slow the nation’s economy and prompt the central bank to refrain from raising interest rates as inundated coal mines reduce export income.
Disruption to mining and damage to crops in Queensland will damp national growth by 0.2 percentage point this quarter, according to the median of eight estimates in a Bloomberg survey. The Reserve Bank of Australia, which meets Feb. 1, may discuss what could prove to be a “significant impact” on the economy, board member Donald McGauchie said this week.
“The RBA is likely to tread more carefully than it otherwise might have,” said Stephen Walters, chief economist for Australia at JPMorgan Chase & Co. in Sydney, who abandoned his call for a February rate increase and now sees no move until May. “It’s tough to hike when one of your states is suffering a natural disaster.”
A delay in increasing borrowing costs may restrain the Australian dollar, which last year surpassed parity with its U.S. counterpart and on Dec. 31 touched the highest level since being floated in 1983. Dennis Gartman, an economist and editor of the Gartman Letter in Suffolk, Virginia, recommended selling the local currency against the euro as the hit to it will be “as real as the damage wrought by the flooding.”
China Link
“Live by exports, die by exports,” Gartman wrote in a Jan. 4 note to clients. Australia’s expansion has been propelled by shipments of iron ore and coal to China, the fastest growing major economy, a dynamic that’s seen the nation’s unemployment rate approach half the level of the U.S. Floods affecting about a million square kilometers, or an area the size of France and Germany, risk hampering that link.
The Australian dollar touched 99.29 U.S. cents today, the lowest level since Dec. 21. It traded at 99.38 U.S. cents at 10:51 a.m. in Sydney from 99.44 U.S. cents yesterday in New York.
RBA Governor Glenn Stevens, who has increased the overnight cash rate target seven times since October 2009, left the benchmark at 4.75 percent last month. By contrast, the U.S. Federal Reserve last month kept its target rate for overnight loans between banks at a range of zero to 0.25 percent and pledged to keep it exceptionally low for an “extended period.”
Queensland produces 95 percent of Australia’s sugar, is its largest coal exporter and accounts for about 20 percent of the A$1.3 trillion ($1.3 trillion) economy. Australia’s growth slowed to 0.2 percent in July to September, the weakest pace since a contraction at the end of 2008.
Contracts Affected
BHP Billiton Ltd., Rio Tinto Group, Macarthur Coal Ltd. and Anglo American Plc are among producers that have declared force majeure, a legal clause invoked by companies when they can’t meet obligations because of circumstances beyond their control.
The floods have cut production of coal by about 4.5 million metric tons since the start of December, Colin Hamilton, an analyst at Macquarie Group Ltd., said in an e-mail. Coking coal prices may increase by about a third, analysts from Macquarie, Morgan Stanley and Daiwa Capital Markets said.
“There’s very substantial damage to infrastructure,” McGauchie, who is also chairman of Nufarm Ltd., Australia’s largest supplier of farm chemicals, said in a telephone interview Jan. 5. “The consequences to export income could be quite substantial.”
Rate Outlook
Food prices may also rise because of the flooding, adding to inflation pressures forecast to prompt Stevens later this year to resume the Group of 20’s steepest rate increases since the financial crisis. Higher food costs will add 0.2 percentage point to the consumer price inflation rate in the first quarter, the Bloomberg survey of economists showed.
Jarrod Kerr, director of rates strategy at Credit Suisse AG in Singapore, predicts the RBA will increase borrowing costs by three quarters of a point by year-end even after the floods cut growth as much as 0.5 percentage point for the current and previous quarters.
A measure of investor expectations for the RBA’s benchmark derived from rate futures indicates about 37 basis points of moves this year, which “looks light,” Kerr said.
The rebuilding may aid growth later this year, adding to pressures on Australia’s job market. State Premier Anna Bligh said “this is a disaster on an unprecedented scale and it is going to take an unprecedented, sustained effort to rebuild.” Prime Minister Julia Gillard has pledged federal aid, while reaffirming yesterday her government’s intention to return the budget to surplus over the 2012-2013 fiscal year.
Fitch Comment
Fitch Ratings said today the floods will affect Queensland’s budget and fiscal position. “The extent to which it will is still unclear,” Fitch said, adding it expects the overall financial impact to be “manageable.”
“Disasters often end up boosting demand because of rebuilding of bridges and road repair and other construction,” said Rob Henderson, chief markets economist at National Australia Bank Ltd. in Sydney. “The RBA will be watching carefully to make sure that any increase in food prices which pushes up the CPI isn’t reflected in higher wages and prices.”
The impact of the floods has stretched beyond Australia. China Steel Corp.’s costs for coal increased by $10 million because of the flooding, Executive Vice President Chung Le-min said from Kaohsiung, Taiwan. Taiwan’s biggest maker of the metal has bought spot coal from Russia and Canada as some Australian suppliers were unable to deliver the raw material, he said.
Australia had its third-wettest year on record during 2010, according to the Bureau of Meteorology, which says showers and storms will continue across Queensland into next week.
To contact the reporter on this story: Michael Heath in Sydney at mheath1@bloomberg.net
To contact the editor responsible for this story: Stephanie Phang in Singapore at sphang@bloomberg.net
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