Economic wrap - Autumn 2011

The waters may have subsided, but the economic impact of the recent flood disaster is likely to be felt for some time.

Economists predict the Queensland and northern New South Wales floods will knock around one per cent off the Australian economy in the December and March quarters. However rebuilding should see at least half of this recouped by year’s end.

Given the extent of the flooding, damage to public infrastructure such as roads, railways, bridges, electricity and water supply could easily top $10 billion.

Yet until the true cost of the damage is calculated, economists widely believe the Reserve Bank of Australia (RBA) will keep rates on hold, which is good news for borrowers.

AMP chief economist Shane Oliver says the RBA will be more concerned with the negative impact the floods may have on economic growth than in increasing rates.

As such, he expects the RBA Board to leave the cash rate at 4.75 per cent until Q3, when positive inflation – generated by the mining sector – starts to push upwards.

At present, the mining boom remains alive and well. And, if anything, the boom is strengthening with the terms of trade continuing to rise. The impact is feeding through the economy via higher wealth levels and dividend payments, higher employment, higher tax receipts and higher business investment.

Mining investment, which accounts for 4 per cent of Australian GDP, is set to add around 1.5 percentage points to Australian economic growth this financial year and 2.5 percentage points to growth for the 2011-12 financial year, according to ABS business investment intentions data.
Overall this suggests an environment of reasonable – albeit still somewhat disparate – economic growth, consistent with around 15 per cent profit growth.

So, while the floods may result in soft economic growth in the near term, from mid-year onwards there is a risk that the economy will start to overheat. This is a result of reconstruction following the floods and a boost in replacement spending by consumers combined with a surge in mining investment.

This will lead the RBA to resume tightening, which may result in the lifting of the cash rate.
With potential rate hikes towards the end of the year borrowers should now be thinking about how this will impact their capacity to meet mortgage repayments and what steps need to be undertaken to help relieve any stress.

Feel free to give us a call to discuss your situation – I’d be happy to run some scenarios and explore whether there may be a more appropriate home loan for your circumstances and financial goals.