Australia’s Economy Likely Shrank by Most in 20 Years on Floods

Australia GDP Likely Shrank for First Time Since 2008
Ruined food and debris are covered in mud after flooding at Brisbane Market in Rocklea, a suburb of Brisbane, Australia, on Saturday, Jan. 15, 2011. Photographer: Eric Taylor/Bloomberg

Australia’s economy probably shrank last quarter by the most in two decades as floods inundated coal mines and farmland, a contraction the central bank sees as temporary before growth rebounds in the second half of the year.

First-quarter gross domestic product fell 1.1 percent from the previous three months, the biggest drop since Australia’s last recession in 1991, according to the median of 22 estimates in a Bloomberg News survey. Prior to a report earlier today showing a reduced contribution to GDP from exports, the median was a 0.3 percent decline.

“The weakness of the data this morning is probably sufficient to make the Reserve Bank delay raising interest rates a month longer than I thought,” said Stephen Roberts, a senior economist at Nomura Australia Ltd. in Sydney who had forecast an increase when the RBA meets June 7. “They’ve got a bit more time -- though they’ll still need to get in” before a second-quarter inflation report due July 27, he said.

RBA Governor Glenn Stevens has pledged to look past data distorted by natural disasters and said rates will rise “at some point” to contain inflation. The local currency has risen 27 percent in the past 12 months as companies including BHP Billiton Ltd. increase hiring to meet Chinese and Indian demand for iron ore and coal, pushing unemployment below 5 percent.

Compared with a year earlier, Australia’s economy probably expanded 0.8 percent in the first quarter, after gaining 2.7 percent from a year earlier in the previous period, the survey of economists showed.

Net Exports

Australia’s current-account deficit widened more than economists forecast in the three months through March as the natural disasters hurt resource shipments, a government report showed today. Net exports subtracted 2.4 percentage points from GDP growth in the first quarter, more than double the decline economists forecast, the Bureau of Statistics said.

The local currency was little changed after the report, trading at $1.0713 at 2:32 p.m. in Sydney from $1.0741 before the release.

Driving the economy is mining investment the government estimates will be A$76 billion ($82 billion) next fiscal year. BHP, the world’s biggest mining company, is expanding its iron ore operations in Western Australia state’s Pilbara region. energy companies are also considering new developments.

ConocoPhillips and Origin Energy Ltd. say they plan to approve a liquefied natural gas venture in the middle of this year and begin exports in 2015. The proposal, in Queensland state, follows Santos Ltd. and BG Group Plc developments and may cost more than A$20 billion, according to Citigroup.

Two-Speed Economy

“Some areas of the economy are expected to be very strong, while conditions will be quite difficult in others due to the appreciation of the exchange rate and subdued consumer spending,” the central bank said in a quarterly review in Sydney on May 6.

Household spending accounts for 54 percent of Australia’s economy, and a government report this month showed retail sales unexpectedly fell 0.5 percent in March, the first decline in five months. Sales adjusted to remove inflation stagnated in the three months through March from the previous quarter.

The local dollar surpassed $1.10 on May 2, the highest level since it was freely floated in 1983. The currency’s strength is hurting exporters including Henderson, Western Australia-based shipbuilder Austal Ltd.

Restrictive Rates

The RBA’s benchmark interest rate of 4.75 percent is the developed world’s highest, raising debt payments for homeowners. Myer Holdings Ltd. and David Jones Ltd., Australia’s biggest department store chains, reported declines in quarterly sales on May 11.

A central bank report today showed loans provided by Australian banks and finance companies were unchanged in April from the previous month. A separate government report showed building approvals fell in April, the third drop in the past four months.

In a quarterly outlook released May 6, the RBA forecast growth will be 4.25 percent this year, unchanged from its February estimate. Consumer prices will rise 3.25 percent over the period, from a previous prediction of 3 percent, and core inflation will quicken to 3 percent from 2.75 percent, it said.

“Australia’s terms of trade are likely to rise further in the June quarter, to be above the level assumed a few months ago -- and at their highest level in at least 140 years -- boosted in particular by high prices for iron ore and coal,” the RBA said, referring to a measure of income earned from exports.

Queensland Floods

Disrupting trade were floods in Queensland state in January that Prime Minister Julia Gillard called the nation’s most expensive natural disaster. Queensland produces 80 percent of steel-making coal exports from Australia, the world’s biggest supplier, and grows more than 30 percent of the country’s fruit and vegetables.

An area the size of Egypt was declared a disaster zone, including parts of the state capital, Brisbane, and helped push Australia’s trade balance into deficit in February for the first time in almost a year.

Expanding resource projects helped Australia post record employment growth last year before hiring cooled in the first four months of the year. Still, the number of unemployed Australians in April fell to the lowest level since January 2009.

“Most leading indicators point to further growth in employment over the months ahead, although at a slower pace than in 2010,” the Reserve Bank said May 6. It also predicted the jobless rate would fall to 4.25 percent by December 2013.

Wage Claims

Lower unemployment has prompted workers to seek higher wages. The Community and Public Sector Union is threatening industrial action including a strike starting July 1 as it seeks annual pay rises of 4 percent. Union workers from BHP to Qantas Airways Ltd., Australia’s biggest airline, are also considering industrial action.

The Australian dollar’s strength is driving consumers to purchase cheaper goods over the Internet, hurting domestic retailers, Patrick Elliott, chairman of JB Hi-Fi Ltd. said April 3. The advance in the household savings rate, which reached 9.7 percent at the end of last year from 1.5 percent three years earlier, is further crimping profits.

Further weighing on consumers, the government said this month it will end 23 years of spending growth to help ease inflation pressure and support the return to a budget surplus. Gillard’s administration is trying to ease the need for higher borrowing costs for consumers and businesses.

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