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Economic note: 6 February 2011

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As Queensland reels from the impact of another devastating natural disaster, I know the thoughts of all Australians go out to those communities hit for six by Tropical Cyclone Yasi, particularly the loved ones of the young man who lost his life. I toured Cardwell with Queensland Premier Anna Bligh on Thursday afternoon, where we saw first-hand the great stoicism and strength of Queenslanders as they again confront the worst that nature can throw at them. Earlier that day the Prime Minister and Attorney-General Robert McClelland announced Commonwealth Government assistance for people affected by Cyclone Yasi, including the Australian Government Disaster Recovery Payment, the Disaster Income Recovery Subsidy, and assistance under the Natural Disaster Relief and Recovery Arrangements. While it is too early for a preliminary estimate of the damage bill, the federal contribution after Cyclone Larry in 2006 was the best part of half a billion dollars and we have arrangements in place to provide similar support this time around. Once again we’ve seen houses destroyed, crops decimated, and cars and boats wrecked, but I know these communities will recover, and they’ll prosper again - because that’s what Australians do.

Economic Impact

After only just getting an initial sense of the economic impacts of the floods, we’re now forced to come to terms with the damage and destruction from Cyclone Yasi. As I’ve flagged for a couple of weeks now, we expect that the floods will take ½ percentage point off the nation’s growth in 2010-11, with much of the impact in the March quarter. While it’s too early to tell what the full impact of Cyclone Yasi will be, we do

know it will make what was already a very difficult situation even worse.

Even at this early stage, it’s clear that severe damage was done to crops, buildings and infrastructure in affected areas. The impact will be particularly devastating for local farmers. The region impacted by the cyclone contributes around $1 billion of agricultural production annually, and initial reports suggest at least half of that has been wiped out this year, including around 80 per cent of the state’s banana crop. Tourism will also take another hit, with the area directly impacted by the cyclone accounting for around 5 per cent of Australia’s tourism earnings. Some towns hit hard by the cyclone, like Mission Beach with the nearby Dunk Island Resort, are particularly reliant on tourism for employment and income.

Cyclone Yasi is also going to compound the cost of living pressures that families have already been facing from the floods. Before the cylone, we’d estimated that the floods would already add ¼ percentage point to inflation in the March quarter. The area hit by the cyclone produces some 90 per cent of Australia’s bananas and one-third of Australia’s sugar cane - so we’re looking at another big price impact here. Preliminary estimates from Treasury suggest that Cyclone Yasi could add at least another ¼ percentage point to the CPI on top of that, perhaps even more. But while this spike in fruit and vegetables is inevitable, we can take some comfort that this will only be temporary. When Cyclone Larry hit this part of Queensland in 2006, we saw banana prices rise something like 400 per cent, unwinding some months later.

Reserve Bank

On Tuesday, the independent Reserve Bank announced its decision to leave the official cash rate unchanged at 4.75 per cent. This was obviously welcome news for many Australian families, especially those doing it tough battling flood damage in parts of our country. As we set about rebuilding our flood- and cyclone-affected communities, we’re doing all we can to ensure Australians can keep meeting the cost of their mortgage and other living expenses, with the Australian Government Disaster Recovery Payments expected to provide a total of around $600 million in short-term financial assistance to around half a million Australians affected by the floods. We worked with the banking sector during the global financial crisis to put in place generous hardship provisions for families who were struggling, and I’m pleased to note that many lenders have continued to provide repayment holidays and other assistance for flood-affected borrowers, as well as dropping ATM fees for them.

On Friday, the Reserve Bank’s latest quarterly Statement on Monetary Policy confirmed that the January floods will have a big impact on our economy, consistent with the Government’s forecasts. But the RBA also made the important point that while these events are significant, they will not knock our economy off its medium-term course. We have strong job creation, a large pipeline of investment, and a fiscal position that is the envy of the world - and in these difficult times it’s important to remember that our future remains bright.


Investment Pipeline

Data released last week provides further evidence of the strong fundamentals of our economy, in particular our large pipeline of investment. Access Economics’ Investment Monitor (which lists projects with a value of $20 million or more) showed that the value of total recorded projects increased $6.8 billion in the December quarter to around $777 billion - 13.5 per cent higher than a year ago. There was a particularly strong increase in the number of committed projects, which rose by 59 per cent to around $60 billion in the December quarter. This largely reflects the development of BG Group’s $15 billion Curtis LNG project in Queensland and Hancock Prospecting’s $7.2 billion Roy Hill 1 iron ore project in Western Australia.

While there has been a big increase in the number and value of mining and LNG projects, we continue to see evidence that the investment boom is becoming more broad-based, with some important projects coming online in other sectors - such as utilities and transport. According to Access Economics, “given the already impressive pipeline of engineering projects and the expected strength of commodity demand over the medium term, investment spending is well placed to lead the Australian economy forward in 2011.” The release of the RBA’s commodity price index last week showed that commodity prices continue to provide support for this pipeline. The index rose by 4.5 per cent in January to be 49 per cent higher through the year - with much of the increase due to iron ore and coal prices.

So the investment outlook is positive, but the task of rebuilding Queensland from recent flooding - and now Cyclone Yasi - is a massive one. As I mentioned in last week’s note, the infrastructure rebuild will put further pressure on skilled labour and other resources needed to undertake the task. This may mean some delays in private sector projects, along with the $1 billion of infrastructure projects that will be deferred as part of the Government’s response to the floods.

Business Taskforce

We’ve seen tremendous generosity from all sectors of the business community, with substantial financial and in-kind donations for those impacted by the floods. Businesses ranging from major corporates to the smallest family-run store have been chipping in to provide goods and services like clothing, bed linen, furniture and toys, short-term accommodation, building materials, transportation and heavy equipment. Over the past two weeks, over 1,100 offers of assistance and in-kind support have poured in - no small achievement coming on top of the millions of dollars in cash donations.

Last Friday I chaired the second meeting of the Queensland Business Taskforce, which is focused on marshalling the resources of the business community to help rebuild Queensland. This work has become even more important with the destruction wreaked by Cyclone Yasi. The taskforce is focused on getting in-kind donations to where they are needed most, with 50 per cent of these donations already linked to those in need. The taskforce will continue to work with the Queensland Reconstruction Authority to identify the needs of affected communities and match them with in-kind contributions. And given the magnitude of the task, we’ll be working to encourage businesses right around the country to see what else they can do as we rebuild Queensland after the devastation of the floods and Cyclone Yasi.

Coming Up

The first parliamentary sittings for 2011 will begin this Tuesday. The focus of the first day back will be a condolence motion for the victims of the floods, which will take the place of Question Time at 2.00pm AEDST and can be watched online here. We’re looking forward to working co-operatively with the crossbenchers in both Houses of Parliament to progress the rebuilding effort and the Government’s substantial reform agenda. One of the pieces of legislation being introduced this week is the bill to implement the temporary flood reconstruction levy. It’s important that Parliament consider the levy in the autumn sittings, to give the ATO, employers and accounting software providers time to get ready for the changes ahead of the start of the new financial year on 1 July 2011. The levy will only apply in 2011-12, and people with incomes below $50,000 won’t pay anything. At higher incomes the levy amounts are modest, with a person earning average full-time wages of $68,125 paying $1.74 per week. The trail of devastation left by Cyclone Yasi through Far North Queensland this past week reinforces how important it is for everyone in our community to pull together through these tough times. It's been inspiring to see the way Australians have come together to meet the challenges that have been thrown at them, one after the other, and I hope the Parliament can show the same Aussie spirit as we consider legislation which is critical to help those in need rebuild and recover.

Wayne Swan Deputy Prime Minister and Treasurer of Australia Sunday 6 February 2011