Floods push Australia into red but not for long, says bank

PM Julia Gillard called the Queensland floods the nation's most expensive natural disaster. Photo / APN

Australia's economy probably shrank last quarter for the first time since 2008 as floods inundated coal mines and farmland, a contraction the central bank sees as temporary before growth rebounds in the second half of the year.

First-quarter gross domestic product fell 0.3 per cent from the October-December period, when it rose 0.7 per cent, according to the median of 25 estimates in a Bloomberg News survey.

The Bureau of Statistics releases the report in Sydney today, six days before the Reserve Bank of Australia decides on interest rates.

RBA Governor Glenn Stevens has pledged to look past data distorted by natural disasters and said interest rates would rise "at some point" to contain inflation. The local currency has risen 27 per cent in the past 12 months as companies including BHP Billiton. increase hiring to meet Chinese and Indian demand, pushing unemployment below 5 per cent.

"The outlook for the economy should remain supportive of a near-term increase in interest rates," said Joshua Williamson, a senior economist at Citigroup in Sydney, who forecast a 0.3 per cent GDP decline and a rate increase in August.

"The exceptional strength of planned investment in mining illustrates the significant challenges the RBA faces in trying to ensure that the boom can be accommodated without leading to a significant overshooting of its inflation target."

Compared with a year earlier, Australia's economy probably expanded 1.8 per cent in the first quarter, after gaining 2.7 per cent from a year earlier in the previous period, the survey of economists showed.

Australia's current-account deficit widened more than economists forecast in the three months through March as the natural disasters hurt resource shipments, a Government report showed yesterday. Net exports subtracted 2.4 percentage points from GDP growth in the first quarter, more than double the decline economists forecast, the Bureau of Statistics said.

Driving the economy is mining investment the Government estimates will be A$76 billion ($98.7 billion) next fiscal year.

The aussie dollar surpassed US$1.10 on May 2, the highest level since it was freely floated in 1983. The currency's strength is hurting exporters.

The RBA's benchmark interest rate of 4.75 per cent is the developed world's highest, raising debt payments for homeowners. A central bank report yesterday showed loans provided by Australian banks and finance companies were unchanged in April from the previous month. A separate Government report showed building approvals fell in April, the third drop in the past four months.

In a quarterly outlook released May 6, the RBA forecast growth will be 4.25 per cent this year, unchanged from its February estimate. Consumer prices will rise 3.25 per cent over the period, from a previous prediction of 3 per cent, and core inflation will quicken to 3 per cent from 2.75 per cent, it said.

"Australia's terms of trade are likely to rise further in the June quarter, to be above the level assumed a few months ago - and at their highest level in at least 140 years - boosted in particular by high prices for iron ore and coal," the RBA said.

Disrupting trade were floods in Queensland in January that Prime Minister Julia Gillard called the nation's most expensive natural disaster. Queensland produces 80 per cent of steel-making coal exports from Australia, the world's biggest supplier, and grows more than 30 per cent of the country's fruit and vegetables.

An area the size of Egypt was declared a disaster zone, including parts of the state capital, Brisbane, and helped push Australia's trade balance into deficit in February for the first time in almost a year.

Expanding resource projects helped Australia post record employment growth last year before hiring cooled in the first four months of the year. Still, the number of unemployed Australians in April fell to the lowest level since January 2009.

- BLOOMBERG