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Flooding in Australia Dampens Economic Outlook, Policyholders Already Filed $1.19B in Claims

Source: WSJ

Posted on 24 Jan 2011

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The release of weaker-than-expected producer-price figures and a profit warning from one of the Australia's largest food retailers on Monday are indications of early signs of how the impact of Queensland state's flooding has spread to the wider economy.

The Australian Bureau of Statistics said pressure on import prices pegged growth in Australia's producer-price index to just 0.1% in the fourth quarter, well short of the 0.7% rise expected by economists surveyed by Dow Jones Newswires. The figures were released after Woolworths Ltd., one of the country's largest grocery and general-merchandise retailers, downgraded guidance for earnings growth this year, partly citing disruptions from the floods that started late last year.

A further indication of the cost of flooding came Monday when the Insurance Council of Australia said that policyholders had already filed A$1.2 billion (US$1.19 billion) in damage claims.

Meanwhile, residents of six towns northwest of the Victoria state capital, Melbourne, evacuated their homes Monday, as levees failed near Australia's longest river, the Murray. Flooding in the region over the past two weeks has affected 60 towns in an area larger than Denmark.

The residents were directed to flood-relief centers in towns near Swan Hill, a city of about 10,000 on the Murray's south bank. Floodwaters from the Murray and its tributary the Loddon were expected to peak in Swan Hill by Friday.

Economists said that signs of slowing growth in the economy make it unlikely that the central bank will increase interest rates at its policy meeting next week. The Reserve Bank of Australia is widely expected to hold interest rates at 4.75%. Queensland state accounts for a fifth of the country's output.

Richard Grace, head of currency strategy at the Commonwealth Bank of Australia said that an increase in rates in the next quarter would be viewed as "heartless" and he doesn't expect to see further increases until the second half of the year, when demand generated by reconstruction in Queensland could see inflation and prices climb.

The central bank wasn't available to comment Monday.

According to a report last week by Australia & New Zealand Banking Group Ltd., the rebuilding of Queensland could reach 20 billion Australian dollars, with many economists warning the impact of crop destruction and disrupted coal exports in the state could force an economic contraction in the first quarter.

Consumer price inflation is expected to have climbed 0.7% in the fourth quarter, adding to concerns over inflation as the central bank looks

increasingly unlikely to meet its 3% upper limit for the measure. The Australian dollar rallied 6.1% in trade-weighted terms in the fourth quarter, pushing through parity with the U.S. dollar for the first time since its float in 1983. But lower import costs failed to ease pressure on prices. Instead, Australian retailers felt the pinch toward the end of the year, as the exchange rate forced many consumers overseas and demand in stores languished as shoppers struggled with higher mortgage and loan repayments.

Woolworths partly blamed weaker trading over Christmas, along with the flooding in Queensland, for its revision of earnings growth. The company said

it now expects full-year fiscal net profit to grow in a range of 5% to 8%, down from its previous guidance of 8% to 11%, after announcing an increase in second-quarter sales to A$14.39 billion from A$13.84 billion in the same period last year.
Australia's policy makers have struggled to manage a growing economy spurred by Asian demand for the country's vast supplies of coal and iron ore.

Paul Brennan, head of Australian economics at Citigroup said any respite from inflation pressures will be temporary.