Australian Floods May Take Significant Economic Toll, RBA's McGauchie Says

The worst flooding in half a century in Australia’s northern state of Queensland may have a “significant impact” on the nation’s economy as exports are interrupted, said central bank board member Donald McGauchie.

“On what can be seen at the moment, 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 today. “The consequences to export income could be quite substantial.”

Record rainfall triggered flooding across an area of Queensland the size of France and Germany, forcing towns to be evacuated, closing mines and spoiling crops. The state is Australia’s largest coal exporter and accounts for about 20 percent of the nation’s A$1.28 trillion ($1.29 trillion) economy.

McGauchie said that while it was still too early to judge the extent of the damage, reports he received suggest it “looks pretty severe.” He said if that were the case, the disaster would be discussed by the Reserve Bank of Australia’s board, which he has been a member of since 2001. The next RBA meeting is on Feb. 1. McGauchie’s second term at the bank is due to expire at the end of March.

Export-coal prices at the Australian port of Newcastle, an Asian benchmark, gained 3 percent in the three days to Dec. 31 to $126.10 a ton, the highest level since October 2008, according to Petersfield, England-based researcher IHS McCloskey. The price is for thermal coal used to make power. Coking coal, used in steelmaking, advanced 2.3 percent, according to McCloskey.

Crisis Talks

Queensland’s government will hold crisis talks today to plan a response to the floods and U.S. Secretary of State Hillary Clinton yesterday offered her condolences and said the Obama administration stood ready to help.

McGauchie said that while reconstruction after the disaster was likely to spur the economy, it may face problems.

“At a time when there are a whole lot of infrastructure projects in the economy, skills shortages and capacity shortages could make it harder to get some of the projects done quickly or make them very costly,” he said. That “could have” inflationary effects, he said, while noting it was still possible the damage might not be as bad as feared.

Australia’s wheat and coal industries are being hurt “by the Old Testament-like floods,” and investors should sell the Australian dollar against the euro, Suffolk, Virginia-based economist Dennis Gartman said in his daily newsletter yesterday.

The Australian dollar dropped 1.8 percent to $1.0057 this week, the worst performance among the 16 most actively traded currencies versus the U.S. dollar. The so-called Aussie traded at 0.7556 euro, after reaching a record high of 0.7735 on Dec. 29.

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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