A closer look at the financial impact of Australia’s epic floods

By Gregory White
Jan. 27, 2011, 11:48 AM The weather: it has been blamed for the weak Q4 2010 UK GDP, today’s disappointing jobs number in the U.S., and soaring commodity prices. Obviously a lot of folks don’t buy that, but the impact is self-evident, especially in Australia. The government is so worried the money spent on rebuilding Queensland, the area of Australia wrecked by floods, will drive up inflation, it’s proactively cutting the budget, according to Societe Generale. Further, its raising taxes on the country’s highest earners to pay for the rebuilding of the region, cutting what they can spend. The idea is that Australia’s federal government doesn’t want to force the central bank’s hand too quickly to raise rates. That hike is now expected in Q3, according to SocGen. And why does the country need the rate hike? Food production is going to be very weak for some time, contributing to inflation. From Societe Generale:

Fresh food prices will rise dramatically. The price impact will be significantly inflationary given that Australia’s extremely strict quarantine laws do not generally permit substitution with imported fruit and vegetables. The most likely channel is through higher fruit and vegetable prices, with the main impact likely in the first quarter of 2011. As an initial estimate, we have factored in a minimum 10% rise in fruit & vegetable prices which would add 0.25ppt to QI CPI growth. On an annualised basis this will add a full percentage point to the annual inflation outlook for 2011 and it is an entirely plausible that inflation will be just as strong in the second quarter. …

A Closer Look At The Financial Impact Of Australia’s Epic Floods