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News Analysis: Australia's flood-hit economy not drowning, waiting

06-03-2011 08:58 BJT

SYDNEY, June 3 (Xinhua) -- Australia's worse than expected GDP result that has all but concealed a dive in national productivity may hit the federal budget but not the broader economic outlook.

Australia's gross domestic product fell sharply in the first three months of the year after floods and cyclones tore the heart out of exports, services and productivity. In figures released Thursday, Australia's first-quarter GDP dropped by 1.2 percent, while real GDP growth reduced by 1.7 percentage points.

The result surprised both analysts and Federal Treasurer Wayne Swan who last night put on a brave face to the ABC, saying "The impact of the floods in Queensland, Cyclone Yasi.. it meant that our economy took a very big hit in the March quarter and we were upfront about that at the time ...It is very significant."

The 1.7 percent detraction represents Australia's worst result since the dark days of Paul Keating's infamous "Recession we had to have" in 1991.

A summer of storms has been a hammer blow to the mining and agriculture sectors knocking an estimated 12.78 billion U.S. dollars out of the economy.

With a tight budget delivered earlier this month, the Gillard- Swan Government is now out of pocket to the tune of several billion dollars, casting serious doubt over the promises made therein and the expected recovery in national revenue.

However, while economic growth is certain to recover on the back of encouraging terms of trade and rising incomes within a two- speed economy, the pressures on interest rates remain significant.

Productivity has suffered to be down almost 2 percent on a year on year basis to mark the weakest output result for six years. Even more marked was the dent on Australia's export volumes, which fell 8.7 percent, the largest quarterly fall in 37 years.

A combination of results roundly ignored by the market which rallied in the face of both GDP and productivity figures to gain ground enough to place the pressure squarely back on the Reserve Bank of Australia (RBA) which is now expected to squeeze another rate rise in over the coming months.

Roland Randall, Senior Strategist with TD Securities says the rate hikes are coming but not next week.

"With productivity declining and costs rising, with fulsome wages growth and nominal unit labour costs are all important to the RBA decision, but rising wages are not being passed through to CPI (Consumer Price Index) as sellers have no pricing power because consumers continue to save and not spend. This buys the RBA time and may limit the amount of hiking they need to do. Unless of course the consumer comes roaring back and prices accelerate. Then the RBA will need to hike by more (say 100bps instead of just 50bps more).

The RBA will consider these GDP numbers as indicative of bad weather and not much else - the underlying economic momentum is still there

All eyes will now be on the June 7, when the RBA board next meets to consider its next move.

Australia's figures remain mixed, highlighting the chasm between the resources sector and the rest of the economy. The April monthly trade balance is expected to hit over 2 billion U.S. dollars after coal exports and bullish commodity prices rose, while the 22,000 record fall in employment and the deflation of consumer confidence in May represents a 2.5 percent drop from just a month earlier.

This inconsistency is likely to be met by a strong rebound in the June quarter as the economic impacts of the disasters ease and reconstruction in Cyclone and flood hit states such as Queensland and Victoria moves into play.

Swan said that the impact of the summer floods accounted for the deficit in coal and iron-ore exports, the slump in agricultural production and the weakness in the tourism sector which has been unable to woo domestic and international visitors despite an array of marketing concepts.

"Something like 90 percent of Queensland was flood-affected, and 85 percent of Queensland's 57 coal mines suffered production in the early part of the year and of course there were major disruptions to rail lines and ports throughout the state," Mr Swan said, arguing the case that it was business as usual for the resource rich and investment fertile Australian economy.

The Australian Bureau of Agriculture and Resource Economics and Sciences (ABARES) estimated a total resource investment pipeline of over 432 billion U.S. dollars.

"So despite the magnitude of the disasters that we saw in the March quarter, they have not altered the strong underlying fundamentals of the Australian economy. I think what we've demonstrated, yet again, just how resilient our economy is. We've demonstrated how resilient it was during the global financial crisis.. and we came out of that the envy of the world and, of course, we saw the same resilience during the floods," Swan said.

Don't forget that economically, by the time we get it, GDP figures are very old news. The RBA remains focused on the once in a century terms of trade boom and the positive shock to national income that is being delivered to this country; currently reflected in the accelerating rates of business investment. Eventually that should flow through the broader economy."

Editor:Yang Jie |Source: Xinhua

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