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Counting the economic cost of the Queensland floods

By Saul Eslake - posted Thursday, 20 January 2011

The Queensland floods, combined with those in northern New South Wales, western and northern Victoria, and northern Tasmania, may well turn out to be Australia’s costliest ever: not in terms of lives lost (that was Cyclone Mahina, which killed an estimated 410 people when it struck Cape York on March 4, 1899); nor perhaps in terms of insurance claims (partly because many properties are apparently not covered for flood damage, insurance payouts may fall short of those which followed the Newcastle earthquake in 1989, and Darwin’s Cyclone Tracy in 1975); but quite likely in terms of its broader economic consequences.

The floods will have at least four significant economic effects.

The first is their initially negative impact on measured economic activity. To the surprise of many unfamiliar with the way in which economic statistics are put together, damage to or destruction of dwellings, business premises, infrastructure assets and the like is not counted as a negative in compiling measures of economic activity. That’s because commonly-used measures such as gross domestic product (GDP) seek to quantify the flow of production, income and spending over a given interval (such as a quarter). Changes in the value of existing assets which are not the result of production or spending, but which occur for other reasons (such as increases in share or house prices, or damage arising from floods, storms or fires) are reflected in what the Australian Bureau of Statistics calls “accumulation accounts”, and in the national balance sheet; but they do not add to or subtract from GDP.


On the other hand, losses of production or income resulting from natural disasters do subtract from GDP. And in the case of the Queensland floods, these are likely to be quite substantial. Queensland accounts for 56 per cent of Australia’s coal exports; and around 60 per cent of Queensland’s 57 coal mines have been forced to halt or restrict production, either because the mines themselves have been flooded or because rail lines used to take coal to ports have been damaged. This is likely to cost at least $2¼ billion in lost exports during January (although much of this should be made up when production resumes).

Queensland produces 27 per cent of Australia’s fruit (including, not surprisingly, nearly all of Australia’s tropical fruits) and nearly 30 per cent of Australia’s vegetables (including 45 per cent of our tomatoes), 44 per cent of Australia’s cotton, and 93 per cent of Australia’s sugar. Destruction of or damage to these crops is estimated to be at least $1½ billion, and unlike coal exports these losses cannot be made up subsequently.

The same is true of losses sustained by tourist operators as a result of cancelled visits: these have been estimated at in excess of $½ billion. It’s hard to calculate the losses accruing to businesses which haven’t been able to open, or employees who haven’t been able to get to work, as a result of the floods, but they seem likely to be in excess of $1 billion per week.

All told, these losses amount to close to $6 billion, equivalent to around 2½ per cent of the annual value Queensland’s gross State product and just under ½ per cent of Australia’s. If all of these losses accrue in the March quarter, then the value of Australia’s GDP in the current quarter could (all else equal) be reduced by as much as 1½ per cent - almost certainly enough to result in “negative growth” in real GDP for the first time since the December quarter of 2008.

The second effect will be the additional economic activity generated by the rebuilding of homes and the replacement of furniture, floor coverings, appliances and motor vehicles; the replacement of stock and restoration of business premises; and the reparation or reconstruction of roads, bridges, railways and other infrastructure assets. Some of this will take place almost immediately, as retailers re-stock their shelves, and as householders and businesses use their insurance payouts or draw down savings to replace household effects and stock destroyed or damaged in the floods. To the extent that this represents additional spending, it will help to mitigate the detraction from measured GDP in the March quarter noted earlier.

Of course, a good deal of the recovery and reconstruction activities will be spread out over the remainder of this year, in part because of the sheer volume of work that will need to be done, and perhaps also as a result of shortages of suitably skilled labour. Measured economic activity should therefore be higher than it would have been otherwise in the June, September and December quarters - possibly by enough to ensure that, for 2011 as a whole, GDP is no lower than it would have been had the floods not occurred at all.


The third effect will be that on inflation. Banana prices increased by more than 400 per cent over the two quarters following Cyclone Larry, which hit Queensland’s main banana-growing areas in far north Queensland in March 2006, and this had a measurable impact on the “headline” CPI for those quarters (and for the December quarter when prices fell back to more normal levels). Since there are at least some alternative sources of supply for most of the fruit and vegetable crops destroyed or damaged by the floods in Queensland (and Tasmania) - unlike in the aftermath of Cyclone Larry, when the then Government refused to permit bananas to be imported, so that Coffs Harbour producers had an absolute bananza - the effects on prices shouldn’t be quite so dramatic: but it will be noticeable nonetheless. There could also be some temporary upward pressure on rents in Brisbane and other affected cities as people whose houses have become uninhabitable seek alternative accommodation.

As in 2006, the Reserve Bank will “look through” the direct impact of higher fruit and vegetable prices when considering the need for any changes in monetary policy settings, so there is most unlikely to be any impact on interest rates as a result of the floods - unless those price effects start to feed through into higher inflationary expectations.

The final notable economic effect will be on the Federal and State Budgets. The Federal Government has already spent more than $100 million on emergency payments to flood victims, and the direct budgetary cost will rise substantially once reconstruction work gets under way. Under the National Disaster Relief Arrangements, the Commonwealth Government reimburses the States for three-quarters of States’ expenditure on “agreed eligible measures”, which includes “the restoration or replacement … of essential public assets damaged as a direct result of an eligible disaster to pre-disaster standard” and “concessional loans to farmers or operators of small businesses, individuals and non-profit bodies” without “reasonable access to commercial finance”.

The 2010-11 Budget set aside only $80 million per annum for natural disaster relief from 2010-11 onwards (20 per cent less than was provided in the “out years” of the last Budget of the Howard government), which clearly won’t be enough to cover expenses arising from the floods in Queensland and other States. To the extent that these expenses are incurred in the current financial year or in 2010-11, they won’t imperil the government’s commitment to return the Budget to surplus by 2012-13 (except by the amount of additional interest payments on the higher Budget deficits over the next 18 months) - and that commitment shouldn’t in any event over-ride the government’s obligation to provide whatever assistance is needed. However, they should prompt the government to re-think how much it should be setting aside each year for disaster relief, and more generally stimulate the search for on-going expenditure savings which since coming to office more than three years ago it has largely avoided.

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First published in The Age on January 19, 2011.

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About the Author

Saul Eslake is a Vice-Chancellor’s Fellow at the University of Tasmania.

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