SYDNEY (Reuters) - Floods inundating Australia's northern state of Queensland could cut up to 1 percentage point from economic growth, according to a member of the Reserve Bank of Australia's (RBA) board -- the largest estimate yet for the potential damage.
The comment knocked the Australian dollar down over half a U.S. cent to a four-week low of $0.9803 and reinforced expectations that a further increase in interest rates was now unlikely for months to come.
Warwick McKibbin, an academic and a member of the central bank's policy making board, was quoted in the Sydney Morning Herald on Wednesday as saying a fair chunk of Queensland's economy had just stopped.
"If you look at the infrastructure damage and all the networks that have been broken, a hit to the economy of 1 percent is not out of the question," McKibbin said.
A percentage point of Australia's A$1.3 trillion (£819 billion) in annual gross domestic product (GDP) is equal to around A$13 billion.
Most bank economists had estimated the drag could be at most 0.5 percentage points for the year as a whole, with rebuilding adding to growth once the floods had passed.
Queensland accounts for around a fifth of the national economy and more than 80 percent of Australia's coking coal exports, much of which has been hit by the flooding.
Much will depend on how much damage was done to Brisbane, the country's third largest city, where flood waters were not expected to peak until Thursday.
Investors have steadily pared back the chances of another rise in the central bank's 4.75 percent cash rate since the floods first hit in December. Interbank futures now imply almost no probability of a move before July and just a 50-50 chance by October.
Only 19 basis points of tightening are priced in for the next 12 months, compared with as much as 52 basis points late last year.
The Reserve Bank is already far ahead of the rest of the developed world by hiking rates 175 basis points, with the last move coming as recently as November as it sought to head off inflationary pressures from a mining boom.
A BOOST FROM REBUILDING
Bank economists have stressed that while the floods would have a negative impact this quarter and last, growth would later be boosted by rebuilding and repair work, government grants and insurance payments to households and businesses.
"The reconstruction effort is looking set to be larger and larger and could make a significant contribution to growth as early as the second quarter," said Michael Workman, senior economist at Commonwealth Bank.
"Coal exports should also rebound strongly and prices are much higher now with supply constrained," he added. "The boost from the terms of trade should be very powerful."
Stratospheric prices for Australia's major commodity exports, notably coal and iron ore, have lifted its terms of trade to century highs and are showering the economy with cash from profits, investment, employment and tax receipts.
The central bank has estimated this boost is worth between A$150 billion and A$200 billion of extra income for the country every year, which would far outstrip any temporary damage from the floods.
Analysts at Westpac said it was possible that GDP could fall by around 1 percent in the first quarter. Yet for the whole year they estimated the net drag at around 0.3 percentage points as rebuilding should then add to growth and employment.
Jobs growth has outpaced all expectations for many months and the December labour force report, due on Thursday, is expected to show another solid rise of 25,000 in employment, taking the jobless rate down to 5.1 percent.
Government data on job vacancies out on Wednesday showed a healthy 5.3 percent rise in the three months to November, leaving vacancies up over 26 percent on the same period in 2009. This series has an excellent record on predicting employment trends and augurs well for hiring in the months ahead.
With business investment in mining and energy projects ramping up to record levels, a further boost to employment from flood rebuilding could push the jobless rate down to lows that have generated inflation in the past.
"We caution against completely dismissing RBA hikes later in 2011," said Scott Haslem, chief economist at UBS.
(Reporting by Wayne Cole; Editing by Mark Bendeich and Tomasz Janowski)
