In early 2009, not long after the horrific Black Saturday bushfires tore through Victoria, economists estimated that the disaster could cost the economy up to $2 billion. Yet, due to the economic stimulus required to rebuild a destroyed community, many also predicted that GDP would rise after the fires.
Now, two years later, as the water begins to recede in flood-ravaged Queensland and the cleanup efforts begin, analysts are expecting the damage bill to run into the billions. Again, some are also predicting a rise in GDP as Queensland sets about the mammoth task of trying to rebuild.
It’s a paradox of economic measurement. GDP rises despite the huge cost of the floods on industry, personal property and public infrastructure, not to mention lives. As one economist explained to Crikey of the vagaries of GDP: “…when you destroy something it’s not counted and when you build something it is.”
Some have said GDP is not an appropriate measure of the economic effect of disasters like the Queensland floods. In today’s Fin Review, John Quiggin argues that net national income (NNI) would be a much more effective way of translating the devastating effects of the floods on the economy.
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Regardless of who may be right on that, GDP remains a common tool used to measure economic impact. With that in mind, Crikey went to the economists to ask:
“What effect will the Queensland floods have on GDP?”
Adam Carr, senior economist, ICAP:
I think preliminary analysis is saying the contribution to the economy could be up to half a percent of GDP. What’s not clear is what kind of an impact it will have on quarterly growth. Current estimates are pointing to a .2% detraction to growth but you can’t rule out a modest rise either.
The reason for that is the reconstruction effort is huge and that’s not going to be delayed to the second quarter — it’s already started. It’s started today. With that I think you’re going to end up seeing a modest contribution to GDP.
The kick to growth will come from retail investment. People need to replace entire houses and in a lot of cases that’s not just the house but everything inside it — curtains, carpet, fridges. While there were a significant proportion of people who weren’t insured, most people were and what if you’ve got is the largest insurer Suncorp saying ‘write everything off and replace it’.
I know people affected by the flood and they’re out buying stuff today, they’ll have a fully refurbished house in the next few months. The other area is public investment, which will go through the roof. We’ve already seen things like the ferry system obliterated and they are going to have to rebuild that.
Also, demand for trade services has increased. With the demand for trades like electricians, that’s more income for those guys, which in turn flows back into the economy.
The impact on coal is the hard one, because a lot of the major mines are fully operational already. They’ve lost output from the floods and the big question is whether they can ramp production up to meet that lost output. I think they can.
Michael Knox, chief economist and director of strategy, ABN AMRO Morgans
The short term losses are from agricultural output and a small slowdown in mining deliveries. There’s obviously going to be a large need for reconstruction. I think it was 25,000 houses that were flooded and they will all need to be renovated.
It will mostly come from construction, which has been flat in QLD. There are a number of reasons for that. The flat level of construction has led to a soft level of retail in the last two quarters last year.
In the rebuilding efforts after the floods you’ll get a boost in construction and then you’ll get a follow up boost in retail.
I don’t think the coal industry can make up for the lost time as a result of the floods but I think they will get back to where they were in about six weeks. The net result for that is stocks will fall relative to consumption, so you are going to see higher prices.
I don’t think there will be much impact on core inflation, but certainly headline inflation will rise as a result of higher food prices or what could be significantly higher food prices. Core inflation is about wages and I don’t think the floods will affect wages.
Alan Oster, chief economist, NAB
Well look there’s two things you’ve got to remember. GDP is a flow, they count the reduced levels of transactions like mining, agriculture and general services and consumption. We think the floods will take 0.3% out of the December quarter and about 0.5% out of the March quarter.
The other thing to remember is because of the vagaries of national accounts when you destroy something it’s not counted and when you build something it is. So you have to be a little careful, but we think the direct impact will be about $15 billion which is about 1% of GDP — although it will be offset towards the backend of the year.
We didn’t have a rate rise until August, but that could now be delayed a bit longer. The backend of this year is going to be a lot stronger after the rebuilding, repurchasing and so on.
Associate Professor Steve Keen, University of Western Sydney:
Well it’s clearly going to have a negative impact on GDP, but it might also give the government a good reason to breach the fairly silly promise it made in the first place to bring the budget in to surplus. It could give them a publicly acceptable reason to do what they should have done in the first place, which is wait until the economy is out of the woods before they try and bring the budget back into surplus.
Obviously there will be an enormous need to rebuild the housing stock in Queensland, Victoria and parts of New South Wales as well. It was looking like the building trade was on the brink of collapse but now there are fairly good odds that there will be a boom in housing.