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Economic Cost of the Drought

The drought currently affecting large parts of Australia is having a widespread social and economic impact. With the worst affected areas located in outback NSW, southern Queensland, and northern Victoria, farmers are battling to pay their bills and feed their livestock. According to a new report from Commonwealth Bank, the potential cost of the drought could reach $12 billion and have a significant effect on the domestic economy. This massive expense is likely to affect all Australians in the months to come, as the severe economic impact of the drought is passed on to consumers through food price hikes.

According to scientific analysis of Australia’s droughts by the University of Melbourne, "major droughts of the late 20th and early 21st centuries in southern Australia are likely without precedent over the past 400 years." After reconstructing 800 years of seasonal rainfall patterns across the Australian continent, the study found that recent droughts are the worst in history: including the Federation drought (1895-1903), the World War II drought (1939-45), and the recent Millennium drought (1997-2009). While it's too early to tell how the current drought will compare, the acute nature of recent conditions may lead to even worse economic outcomes.

July was the seventh consecutive month of below-average rainfall across NSW according to the latest Bureau of Meteorology climate summary, with NSW experiencing the driest July since 2002 and the fifth-driest July on record. The situation in Queensland is not much better, with Queensland’s Department of Agriculture and Fisheries estimating that 57 percent of the state is currently in drought. New IMF research concludes that hot countries suffer more from climate change than cold countries, with Australia in the firing line more than most. 

According to the Commonwealth Bank report, the current drought has the potential to cut GDP growth by between 0.5 percent and 0.75 percent of GDP. In real number terms, this represents between $8 billion and $12.5 billion. If these numbers eventuate, the economy is likely to experience a 20 percent decrease in farm production, along with a $5 billion reduction in export volumes. The last time this happened was in 2006-07 when rural export volumes dropped by 10 percent over two years. The time before that was in 2002-03 when farm output dropped by 25 percent, which knocked a full percentage point off GDP.  

The situation has become so bad that Reserve Bank Governor Philip Lowe recently told a parliamentary hearing that the RBA board had looked at rainfall charts during its last meeting, something it had not done for some time. When asked about the implications of the drought, Mr Lowe said "It depends very much on the scenario you paint for rainfall... If things return to normal fairly soon we could expect a rebound, but if it goes on like it did in the drought at the turn of the century then the effects on the economy are significant."

During the Millennium drought, food prices rose by 4.5 percent as a result of altered slaughter rates. According to Citigroup environmental, social and governance analyst Zoe Whitton, current conditions could produce even worse outcomes, both for farmers and consumers: "This drought is really quite acute compared to the millennium drought, because while the millennium drought was very sustained, the rain shortfall was less acute... We're seeing a higher rain shortfall over a six month period than we were then, and this shortfall has come on very quickly."

Image source: NCAS_48/Shutterstock

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