Australia | Nov 03 2006
By Greg Peel
Australia no longer rides on the sheep’s back, or the wheat’s ear, like it used to. It rides on things that lay under the soil. To that end while analysts have been sympathetic up to now about the plight of the Aussie farmer and the burgeoning drought, they have quietly pointed out that the rural industry doesn’t have enough clout to make much of an impact anymore. It is less than 3% of the economy.
That attitude might be changing. Economists have been rather slow to catch up to the extent of downward crop revisions and the flow-through effect. Even ABARE has been dropping its forecasts almost weekly, such that grain traders in London and Chicago are on the edge of their bales waiting for the next one. This drought is now expected to be worse than 2002-03, and that one was bad.
ANZ makes the point that the extent of the loss of farm income is expected to knock around 0.8% off GDP, just as it did in 2002-03. But that was off an overall GDP growth figure of 5.25% at the time, while forecast GDP growth for 2007 is only in the 2-3% range.
CommSec puts GDP reduction at a full 1.0%, with a 0.6% reduction from flow-on industries. Chief equities economist Craig James notes that the government has recently been making a song and dance about the drought, and that Treasurer, and highly respected commodities analyst (many of the world’s strategists turn to Pete for guidance), has declared the commodities boom over.
In other words, the politicians are putting as much duress on the RBA as is possible before someone says the government is putting duress on the RBA.
The Bureau of Meteorology has, more importantly, declared the drought a consequence of climate change and not climate cycle. This could be the end of Australia’s rural industry.
(There are, of course, farmers who have grown perfectly good crops with little rain by adapting to conditions rather than sticking their hands out).
Nevertheless, Craig James has said:
“If the Reserve Bank does lift interest rates in the coming week, it will be the riskiest decision it has made in six years.
“That is, since it hiked rates in August 2000 and was forced to cut rates by half a per cent six months later. Drought conditions are worsening, the US economy is slowing and the Australian economy is still responding to the two rate hikes delivered so far this year.”
The futures market has factored in a 100% chance of a rate hike on Wednesday. Contrary to popular belief, futures markets don’t know anything we don’t. While James’ own colleagues at Commonwealth Research are still calling a hike, he is beginning to doubt it.