Drought could cost economy up to $12b

The Reserve Bank and a new report have warned of a hit to economic growth from the ongoing drought, with a potential cost of up to $12 billion.


The RBA board looked at rainfall charts at its last meeting, which it had not done for some time. (AAP)

An extended drought would have a "significant" effect on the economy and food prices, says Reserve Bank Governor Philip Lowe.

Farmers are battling drought with the worst effects in NSW, southern Queensland and northern Victoria.

A new report by Commonwealth Bank has put the potential cost at $12 billion and warned of food price hikes.

Reserve Bank Governor Philip Lowe told a parliamentary hearing on Friday the drought was so significant the RBA board had looked at rainfall charts at its last meeting, which it had not done for some time.

Asked about the outlook, Dr 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 the century then the effects on the economy are significant."

He said in 2002/03 farm output fell around 25 per cent knocking a full percentage point off Australia's growth and leading to many rural workers losing their jobs.

As well, food prices rose by 4.5 per cent, because slaughter rates increase as droughts bite.

"The current drought is not as serious as that one and we all certainly hope it won't be," Dr Lowe said.

In the short term, rural exports could rise as meat production increases, but at risk is an agricultural sector which accounts for up to 15 per cent of total exports.

The Commonwealth Bank report found the current drought had the potential to cut GDP growth by between 0.5 per cent and 0.75 per cent of GDP - or between $8 billion and $12.5 billion.

Chief economist Michael Blythe said while drought may "take the edge" off total growth, the Australian economy was still likely to show a good result overall.

Published 17 August 2018 at 12:36pm
Source: AAP