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Australian Floods to Drown Economy in 2011?

Jan. 22, 2011 11:06 AM ET
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Forex Gump's Blog
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The floods in Australia have caused a ridiculous amount of destruction. Some say it could cost as much as 20 billion AUD to clean up and repair the damage. I mean, flood waters have reached levels so high, fish have actually been spotted up in trees! Fish in trees!!!

How exactly will this affect Australia's economy this 2011? Well, it all depends on what time frame you're looking at.

Short-term Naturally, we can expect the floods to dampen economic activity over the next couple of months.

First of all, we're already seeing a negative impact on exports. For example, take a look at coal, Australia's second largest export. Last quarter, some of the largest coal mining companies in the country reported a 30% decline in output and a 15% drop in sales due to the floods that plagued Queensland.

Queensland, for those of you not in the know, is one of Australia's primary sources of coal but also happens to be one of the worst-flooded regions in the country.

The big problem with floods is that they don't just affect the areas and cities that have been flooded. Even those that have managed to stay high and dry share the headache! Many roads have become impassable, presenting transportation and logistical problems.

How do you get your truck of goods from point A to point B when you've got neck-deep water in between? I doubt Australia has enough life rafts to solve this problem!

To make matters worse, rain has been pouring nonstop, making rescue efforts more difficult and causing power outages that disrupt businesses.

Medium-term Midway through the year though, we should see signs of recovery as economic activity picks up in the second and third quarter. Historically speaking, rebuilding efforts have helped economies recover from natural calamities. As a matter of fact, the government is considering a flood levy to help foot the massive repair bill.

Now, I'm not saying the economy will perform better than it would have had the floods not hit at all. What I'm merely saying is that there is a big potential for a nice rebound midyear, at least in comparison to the first quarter. But don't expect it to be easy.

Anyone who has ever played StarCraft 2 knows that it's hard as heck to rebuild a broken base. Imagine how much harder it is to fix actual cities whose economies and facilities are a GAJILLION times more complicated!

Long-term The gravity of the situation makes you wonder if it has affected Australia's long-term productivity. How much of its capacity has been permanently lost? Plenty of machinery and production facilities have already -been destroyed by the floods.

You also have to consider the fact that the money that will be spent on rebuilding could be spent in other, more fruitful ways.

Let's say the floods wiped out a boomerang factory. Money has to be spent to replace the old one and put up a new one. But if it never flooded in the first place, that money could be spent on making a SECOND boomerang factory. Two boomerang factories means twice the number of boomerangs... and twice the fun!

If you ask me, in the long run, Australia's economic performance will depend mainly on one thing: how much damage was actually done.

Australian floods

Impact on the Aussie As I mentioned in the past, the floods have been drowning the Aussie. Take a look at your charts and you'll see AUD/USD is already about 400 pips lower than where it was at the start of the year.

The outlook doesn't look too bright either, given the economic impact of the floods. And any monetary policy tightening will probably be pushed back as well, so don't hold your breath for a rate hike.

In this humble geek's opinion though, I think the Aussie's ultimate destination will depend on how quickly Australia can get its act together. So what's it gonna be, Aussie? Are you gonna sink or swim?

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