Economic impacts of the North & North West Qld floods – Initial views

All week we have been hearing the awful news about all the dead cattle in North and North West Queensland as a result of the recent floods. An estimate of around half a million dead cattle has been suggested, although some sources are suggesting it could be much higher. At this stage the ultimate impacts are still unclear, although I understand the state government and industry peak bodies are currently developing estimates of the economic impacts. Given all the figures and claims that are currently being heard in the news, I thought readers may be interested in some facts that can usefully inform economic impact estimates.

In Queensland, beef cattle numbers are typically around 11-12 million, averaging 11.5 million over 1999-00 to 2016-17. A loss of 500,000 cattle would represent a 4-5% loss of the stock of beef cattle in the state. Of course, the economic impact in the affected regions would proportionately be much higher, particularly if you take into account backward and forward supply-chain linkages (e.g. backward to farm supplies and forward to abattoirs). In the Northern and Southern Gulf regions and the NQ Dry Tropics regions which appear worst affected, there were an estimated 3.2 million head of cattle in 2016-17, so at least one-in-six head of cattle in these regions may have perished based on an assumed loss of at least 500,000 head (see chart below and the map at the bottom of the post so you can see where the Natural Resource Management regions are).

Beef_cattle_chart1

What could this mean for the state economy as a whole? Consider that the Queensland Government’s handy AgTrends publication forecasts a gross value of production of cattle and calves of just over $5 billion in 2018-19. Additionally, it forecasts value added from meat processing at $2.3 billion, the vast bulk of which (at least 80% I would assume) would relate to beef. For simplicity, let’s scale that up by 50% to allow for value added in the transport, wholesale and retail sectors, and let’s say the floods result in a 5-10% loss in activity over 2019. My back-of-the-envelope calculation is that the economic impact of the loss of cattle related to the floods will be around $500 million to $1 billion this calendar year. Queensland gross state product (GSP) in 2019 will be in the $370-380 billion range I expect, so the loss of cattle could shave 0.1 to 0.3% off GSP depending on just how bad the losses are. And given the loss of calves, part of this impact will persist into 2020.

Of course, these are just the losses related to beef cattle. It is expected there will also be losses in the resources, manufacturing and other sectors. For example, Incitec Pivot, which manufactures chemicals and fertilisers, has already announced a hit to earnings from the closure of the rail line between Townsville and its Phosphate Hill source of supply (see this SMH report and SBS report). Such losses will be an additional drag on economic growth. I expect these negative impacts will, in the short-term, only partly be offset by repair and reconstruction activities.

That said, repair and reconstruction activities are expected to be substantial. I’ve just seen an estimate of $606 million of damages associated with the Townsville floods reported by the Courier-Mail. The related repair and reconstruction expenditures will occur over a few years as suggested in the article.

Queensland Treasury is currently forecasting economic growth in 2018-19 at 3%. Given these floods and all the discouraging economic data we’ve seen lately, I expect Treasury would revise this forecast down, to either 2.75 or 2.5%. Given the adverse economic impacts, as well as the costs of repairing infrastructure, the Queensland Government’s fiscal deficit in 2018-19 will probably increase from the $2.6 billion currently forecast by the Treasury.

Beef_cattle_chart2

Update: Since I published this post I have noticed an estimate from AgForce of a $500 million loss of livestock associated with the floods, as reported in the Brisbane Times:

Qld floods damage bill estimates top $1 billion

In a future post I will explain how we need to be careful when discussing economic loss and economic impact estimates, as they are not necessarily comparable. A good explanation in the context of US Hurricane Harvey can be found here:

How natural disasters affect US GDP

This Brookings post by eminent US economist Martin N Baily is also useful:

Can natural disasters help stimulate the economy?

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Posted in Agriculture, Floods, Mining, North Queensland, Uncategorized | Tagged , , , , , , , , | 12 Comments

The North West Minerals Province – A Better Public Sector Investment than the Capital City

The North West Minerals Province – A Better Public Sector Investment than the Capital City

Guest post by Craig Wilson*

Townsville received the lion’s share of the media coverage in Australia and around the world from the recent flood events. But north west Queensland was also severely affected. As floodwaters recede, the recovery phase has begun. This recovery in north west Queensland is important not just to those local economies stretching along the Townsville to Mount Isa corridor, but also to the state and national economies and treasuries.

It is often under-recognised just how important these economic centres are, most significantly Mount Isa and the wider North West Minerals Province. For example, the Mount Isa economy sends around $1 billion annually to state and federal treasuries and acts as a service centre to a huge portion of northern Australia. This is an enormously productive part of the country. Income per capita in Mount Isa is close to twice the Queensland average. And Mount Isa’s economic activity underpins distant economies, Townsville particularly so and, to a not inconsequential extent, Cairns and Brisbane.

Rail Head Area

A rendering of a future multi-modal transport and logistics facility in Mount Isa

Investments by governments in this part of Australia pay dividends. While so much recent media coverage about mining has been negative, saturated by stories about coal and Adani, many other metal miners have been going efficiently about their business.  Mount Isa Mines has been operating for almost 100 years and continues to anchor the economy in north west Queensland.  The Australian economy and national strategic planners are lucky to have it.

But local elected leaders know that they must constantly look to strengthen and diversify their economic bases; and their economies have been hurt in the not-too-distant past by commodity price volatility and adverse boardroom decisions. A relevant example is a new initiative from Mount Isa City Council – www.discovermountisa.com.au. It is clear that local government leadership matters in the midst of national economic settings. Local governments such as Mount Isa City Council with limited resources are getting on with things – tourism promotion, investment attraction, and branding.

It is natural that these remote but productive economic centres lament the big public sector expenditures occurring in capital cities while they, as regional economic engine rooms, feel unrewarded and rely almost exclusively on private capital. As central policy-makers turn their minds to the recovery phase, both the state and federal governments should look to fast-track projects in the north west minerals province of Queensland.

The right investments will be rewarded.  In the case of the Queensland Government, this includes programs under its existing Strategic Blueprint for that part of the state, including initiatives for common user infrastructure such as the proposed Mount Isa Transport and Logistics Centre, as well as electricity transmission line projects such as Copper String II which will shortly be subject to additional feasibility studies.

The Australian Government should reinvigorate its focus on its northern Australia program – including its excellent work on resource identification by Geosciences Australia, the super basin assessments by the Department of Environment and Energy, and infrastructure strategy led by Infrastructure Australia – and ensure the logical interface of the laudable forthcoming Barkly Regional Deal throughout the economic corridor from Tennant Creek to Mount Isa.

The economics of public sector investment in the north west minerals province is as solid as anywhere in the country, but the political equation has been less favourable and this has meant that opportunities have been overlooked. Hopefully the state and federal governments can reward the good local leadership that is occurring along the Townsville-Mount Isa-Tennant Creek corridor with targeted public sector investments which leverage existing and future private capital.

Craig Wilson is Managing Director of DeltaPearl Partners. DeltaPearl Partners recently contributed to Infrastructure Australia’s 2019 national infrastructure audit, is economic advisor to the Mount Isa City Council, leads the Australian Mining Cities Alliance and provides secretariat support to the Tennant Creek–Mount Isa Cross Border Commission which next meets in Canberra on 12 February 2019.

*I am delighted to publish this guest post from my former colleague at Marsden Jacob Craig Wilson. Craig will be well known to many QEW readers given his extensive experience in economic policy in Queensland and throughout Australia and internationally. For instance, he is a former Executive Director of Economic Policy at the Queensland Department of Premier and Cabinet. It goes without saying that the views expressed in this article are Craig’s and should not necessarily be attributed to me, Gene Tunny.

Posted in Infrastructure, Mining, North Queensland, Uncategorized | Tagged , , , , , , , , , , , , , | 2 Comments

YIMBY, self-fulfilling prophecies, Cairns tourism & Qld GSP growth: Comments & questions on my outlook presentations

I’ve had several interesting comments and questions regarding my economic outlook presentations last week.

YIMBY – Yes in my backyard

In my Brisbane Club presentation last Wednesday Qld: Hot or not? I commented on Brisbane City Council’s temporary planning instrument to restrict apartment and townhouse developments in low-density residential areas (e.g. see this Urban Developer article), saying I thought it was bad policy. Unsurprisingly, given I had an audience filled with property developers and real estate professionals, this was a popular opinion! After my talk, one seminar attendee told me about a group she had set up promoting higher-density development, YIMBY QLD, with YIMBY standing for “Yes in my backyard”. What a fantastic initiative. A good summary of the problems with planning policies discouraging higher-density development is contained in Brad Rogers’s excellent 2013 guest post Old Queenslanders in a New City.

Talking down the economy

After my QMCA presentation, I was asked whether all the negative talk from economists about the economic outlook could actually reduce business and consumer confidence so much that it brings about a downturn. That is, can economists deliver a self-fulfilling prophecy? I replied that I doubt it, given that economic commentary is contestable and that anyone without a sound basis for what they were saying would be shouted down and eventually ignored. Moreover, the economy tends to follow its own path and ignores the prognostications of even the most eminent economists. I noted one of the most infamous economic forecasts of all time, one which clearly had no real impact on the economic outlook, that of esteemed US economist Irving Fisher. In his classic account of the 1929 stock market crash, The Great Crash 1929, John Kenneth Galbraith commented:

That autumn Professor Irving Fisher of Yale made his immortal estimate: ‘Stock prices have reached what looks like a permanently high plateau.’ Irving Fisher was the most original of American economists. Happily there are better things—his contributions to index numbers, technical economic theory, and monetary theory—for which he is remembered.

Cairns tourism

Cairns-based financial commentator Mark Beath questioned whether tourism was “hot” in Cairns. Having had a closer look at the data for Cairns I can report that, while tourism in Cairns from domestic sources has experienced strong growth, there is a lot of concern over international visitor numbers. The Cairns Post reported at the end of last month:

Conus Business Consultancy Services partner Peter Faulkner has crunched the numbers and found an 8 per cent year-on-year drop in Chinese visitation to the region.

That compares to an 8 per cent increase Australia-wide.

Overall international visitor numbers were down 3 per cent in the Far North but up 6 per cent nationally.

Fortunately, domestic tourist numbers were up 15 per cent with expenditure rising 20 per cent, bringing the overall increase in tourism spending in the region to $3.4 billion year-on-year.

The Cairns Post’s description of the data isn’t entirely clear. Total spending in the Tropical North Queensland (TNQ)* tourism region was $3.4 billion in the 12 months to 30 September 2018, up around 12% from around $3 billion in the 12 months to 30 September 2017. These calculations are based on TEQ’s handy snapshots of domestic tourism and international tourism. Thanks to Mark for the question and for prompting me to have a closer look at the data.

Queensland’s economic growth rate

Luke Dixon from AMP Capital, who also spoke at the Brisbane Club event, was asked whether Queensland’s economic growth rate was permanently at a lower level than it was in decades past. It certainly appears to be the case from eyeballing the data (see my chart from my QCMA presentation below). From 1987 to 2000, Queensland’s average annual economic growth rate was 4.7%. Since then it’s been 3.6%.

Rplot_GDP_GSP_growth

I also replied to the question, referring back to the 3P’s framework that Ken Henry popularised while Treasury Secretary. That approach stresses the supply-side determinants of GDP, that is the factors that are relevant in determining long-run GDP growth (as opposed to demand-side factors which can push an economy away from its trend growth path in the short run). Those 3Ps are participation, productivity, and population. The major contributors to GDP growth over the long-run are productivity and population growth, so I focussed on those two Ps.

We know that the population growth rate in Queensland is now much lower than it was in the 1980s and 1990s when interstate migration was at its strongest (see my chart below based on ABS estimates). Also we suspect the productivity growth rate has fallen since 2000. For instance, in the original 2002 Intergenerational Report and in the 2007 IGR, Treasury assumed long-run productivity growth at 1.75% p.a., but it has since revised that assumption to 1.5% p.a. So with lower population and productivity growth, it’s natural that growth rates of Queensland gross state product (GSP), the state equivalent of GDP, would be lower on average than they were in previous decades.

Rplot_components

There were a few more comments and questions I received which I hope to respond to in a future post.

*This region is essentially Far North Queensland and excludes Townsville which has its own tourism region.

Posted in Cairns, North Queensland, Tourism, Uncategorized | Tagged , , , , , , , , , , , | 6 Comments

QEW week that was video – 3/2 to 9/2/19

Earlier today I recorded this wrap up of the past week, in which I discuss my recent economic outlook presentations (with the latest available at the QMCA website), Ken Henry’s resignation as NAB Chair, and Queensland’s state debt, among other issues.

Posted in Macroeconomy, Uncategorized | Tagged , , , , , , , , , , , | 2 Comments

Qld: hot or not? My presentation at the Brisbane Club on Wednesday 6 February

It was a great day to give an economic outlook presentation, with RBA Governor Philip Lowe announcing a change in monetary policy guidance, from saying the next rate movement would most likely be up, to saying the cash rate may well go down rather than up.  I welcomed the announcement because, in addition to it being sensible given the discouraging indicators we’ve seen lately, it was consistent with the views I was expressing in my presentation. Thanks to Ross Elliott from APP Property and Infrastructure Specialists for hosting the seminar at the Brisbane Club I spoke at, along with Luke Dixon the head of Real Estate Research at AMP Capital. Ross seemed happy neither Luke nor I were “drinking the Kool-Aid”, and we were both measured and realistic about the economic outlook. You can download my presentation at this link:

Qld hot or not presentation 6 February 19

I started off by referring to recent disappointing indicators including the Suncorp-CCIQ Pulse business survey (see my post on the data) and the December 2018 retail trade data published yesterday by the ABS (see chart below). I also covered more positive indicators including international visitor expenditure and the coal price, now back over US $200/tonne for coking coal (see slide 8 in the presentation; thanks to QRC for the latest data).

Rplot_retail_monthly

Posted in Infrastructure, Macroeconomy, Uncategorized | Tagged , , , , , , , , , , , , | 2 Comments

Breakfast with Keith De Lacy & me to discuss Beautiful One Day, Broke the Next

Former Queensland Treasurer Keith De Lacy AM and I will speak at an upcoming breakfast in West End, Brisbane on Wednesday 27 February at the Connor Court Book Room regarding my recently published book Beautiful One Day, Broke the Next: Queensland’s Public Finances since Sir Joh and Sir Leo. I’m very much looking forward to hearing more of Keith’s insights into Queensland’s fiscal history and our current situation. Keith made some great contributions to Queensland during his time as Goss government Treasurer (1989-1996), overseeing generally strict budget management and the corporatisation of government-owned businesses, among other achievements. Since that time, Keith has had a distinguished business career and is a former President of the Queensland division of the AICD.

If you’re interested in Queensland state politics or concerned about our current state finances, I expect you would get a lot out of this event in addition to an excellent cooked breakfast from one of West End’s fine cafes. You can book for the breakfast via Eventbrite:

Breakfast with Keith De Lacy and Gene Tunny

cover

Posted in Budget, Uncategorized | Tagged , , , , , | 3 Comments

Thankfully Hayne recommendations are fairly benign – respected commentators have started panicking over economy

Many economists and finance commentators were concerned that the recommendations of the Hayne Royal Commission into banking would lead to further restrictions on credit availability with adverse consequences for the economy. Thankfully the recommendations seem pretty benign, nothing that the industry can’t adapt to, although many mortgage brokers may suffer a significant drop in earnings owning to the recommended removal of trailing commissions. I noticed that Shane Oliver from AMP is being quoted in the AFR that he doesn’t expect the Royal Commission recommendations would lead to any further restrictions on credit availability. We can be thankful for that given the continuing decline in residential building approvals in December 2018 (e.g. see plots below based on the latest ABS estimates released today), which has alarmed at least one highly regarded commentator, Pete Wargent, who in his post today Building approvals point to recession? astutely observed:

No way to dress this up, with the leading indicators of both money growth and building approvals pointing towards weaker or even recessionary conditions over the period ahead (Australia can often dodge technical recessions due to its population growth, but let’s face it, these are quite dire indicators).

Regarding the Royal Commission, you may be interested in my colleague Nick Behrens’s observations on its relevance to small businesses:

QEAS response to the Financial Services Royal Commission

I’d also recommend you listen to CCIQ spokesman Dan Petrie’s insightful and entertaining remarks to Steve Austin on his 612 ABC Brisbane Drive program this afternoon (from around 1:10:35). Dan notes how hard it is for small businesses to get finance from banks unless business owners mortgage their own properties. He suggests, with his tongue only partly in his cheek, that it may be easier and cheaper for many small businesses to get finance from Hong Kong than in Australia. Excellent commentary Dan.

Rplot_residential_approvals_Dec18

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