Economic costs of flood disaster rise as crisis spreads to Brisbane

Economists fear the Queensland flood crisis could cut Australia’s GDP by as much as 0.3% of a percentage point across 2011 as the heavily populated cities of Ipswich and Brisbane become the latest flood flashpoints.

Late last week, when it seemed that the worst of the flood crisis was over, economists including CommSec’s Craig James said the likely impact on economic growth was minimal.

But with flooding intensifying in South East Queensland, the economic impact and the number of affected businesses continues to grow.

This morning, the Reject Shop entered a trading halt as it assesses the damage at its Ipswich distribution centre, which services 90 of its 210 stores.

Dulux and Boom Logistics  have shut the Queensland sites, while hundreds of major businesses throughout Brisbane have ordered staff to remain at home for the next few days as flood levels peak.

Reserve Bank board member Warwick McKibbin has warned that the stalling of the Queensland economy – and particularly it’s vital mining and agribusiness sectors – could result in a 1% hit to GFP, which could cost the economy $13 billion.

“‘If you look at the infrastructure damage and all the networks that have been broken, a hit to the economy of 1% is not out of the question,” he told the Sydney Morning Herald.

Westpac, which released a special report on the potential impact of the flood crisis yesterday, was less pessimistic, but warned that with the size and extent of the flood damage still unknown, quantifying the impact was difficult.

“Overall we see a ballpark estimate of a 0.3% hit to annual GDP as a reasonable assumption with inflation being boosted by 0.1% to 0.2% in the first quarter.”

“The timing of the hit and recovery means we could see first quarter GDP drop by as much as 1% before the recovery boosts growth in the following quarters.”

Westpac nominated the state’s coal industry – which has been all but shut down by rain and flooding in central and northern Queensland – as the biggest drag on economic growth. The cost of lost coal exports could be as high as $3.3 billion, all this will be somewhat offset by a rise in coal prices.

Lost agricultural production will also weigh on economic growth, although Westpac says the impact on food prices should be relatively minimal, which should hopefully keep any flood-related inflationary pressures to a minimum.

However, the wildcard for inflation – and hence interest rates – could occur after the flood crisis eases and the recovery effort gets underway.

As the boom in mining-related investment continues and rebuilding and reconstruction efforts speed up, inflationary pressures may start to emerge as demand for limited resources – particularly skilled workers – increases.

“How this, along with a more general rise in food prices, impacts on inflation expectations will be closely watch by the RBA,” Westpac says.

“While cognisant of the risks, we hold to our current view of just one rate hike from the RBA this year – 25 basis points in the second quarter.”

Prime Minister Julia Gillard has acknowledged that spending on flood relief measures will make the task of returning the Federal budget to surplus in 2012-13 more difficult, but says it is too early to judge what impact the floods may have on the Commonwealth purse.

Despite these initial efforts to quantify the cost of the floods to the wider economy, it is of course far too early to get a sense of how many individual businesses in the state have been affected.

Gillard says the Government will continue to make financial assistance available to small business owners who have been impacted by the crisis.