Oliver's Insights - The implications of the floods for Australia
24 January 2011 - This note looks at the impact of the floods for the Australian economy and share market.
The key points are as follows:
- Like the bushfires of two years ago the floods have wrought terrible tragedy in terms of loss of life and disruption to people's lives. Beyond the human suffering there will also be significant implications for the Australian economy and investment markets.
- Expect the floods to knock around 1% (or $13 billion on an annualised basis) off the Australian economy in the December and March quarters. Rebuilding should see 0.5% of this recouped by year end and a further modest boost to growth through 2012.
- Higher food prices, notably for fruit and vegetables, will add around 0.5% to 0.75% to inflation in the March quarter.
- In terms of damage to physical assets, property, equipment and infrastructure, the flood could cost $15 billion with rebuilding likely to be spread over several years.
- The RBA is likely to look through the short-term boost to inflation and focus more on the short-term hit to growth, leaving rates on hold till around mid year. However, once production rebounds and rebuilding kicks in it is likely to return to raising rates from around mid year to head off an overheating in the economy.
- While the floods have led to earnings downgrades, the impact on markets overall should be minor, in part offset by higher coal prices. Australian shares are cheap, having lagged global markets over the last year, and we remain of the view that notwithstanding short-term uncertainties they will head to around 5,500 for the ASX 200 by year end.
