Australian economy shrank in Q1, due to natural disasters

Australia’s economy shrank by 1.2 percent in the first quarter of this year -- the sharpest quarterly drop in twenty years -- due largely to the devastating floods that swept across parts of the country late last year.

It was also the first time that Australian GDP showed a quarterly decline since late 2008, during the worst days of the global financial crisis.

The flooding and cyclones hammered the natural resource-rich provinces Queensland and Western Australia, curtailing mining operations in many areas.

Australia depends heavily on natural resource exports and profited handsomely from a massive surge in demand.

However, the Australian economy has also been hit by an economic slowdown in two of its biggest resources customers, China and India.

We have been in a honeymoon period for a long time, said Jonathan Barratt, managing director at Sydney-based Commodity Broking Services Pty, according to BBC.

The time has come for realignment. As growth in China and India slows down, the pace of growth in Australia will also be affected.”

Still, most analysts believe this is only a temporary setback and that longer-term, the Australian economy will remain strong,

The economy has hit a temporary pothole courtesy of the natural disasters this year, said Besa Deda, chief economist at St George Bank in Australia, according to BBC.

Similarly, Matthew Johnson of UBS Warburg commented: “The temporary factors have given us the negative, but I am quite confident they'll come back. Underlying strengths of the economy, both domestic demand and gross national expenditure look very good.”

Deda added that as mining activity returns to pre-flooding levels and reconstruction programs commence, the economy is likely rebound by the end of the year.

Sukhy Ubhi, and economist at Capital Economics, concurs that Australia’s economy will show a strong recovery.

“The downturn was primarily due to a sharp decline in exports, reflecting the plunge in coal shipments as Queensland’s mines and ports were badly hit by floods in early 2011,” he said.

“Growth will inevitably resume in coming quarters. The key point is that strengthening business investment is set to bring above-trend growth in 2012.”

Ubhi added that he majority of Queensland‘s coal mines are open again and transport links have been restored.

“We expect the economy to expand by about 3 percent this year and 4.0 percent in 2012, up from 2.7 percent in 2010,” he concluded.