Between rolling natural disasters and COVID, Australia’s economy is experiencing a shift from shock to persistent problem

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Major flooding in suburban areas of Melbourne in the last couple of days have only reinforced the sense that we are now in a world of more or less rolling natural disasters.

The times when a massive bushfire or flood event were a shock to the system seem to have well and truly passed.

Disaster relief agencies — and even the Australian Defence Forces — are dealing instead with persistent crisis.

Last month, the Guardian reported that, in its brief to the incoming government, the Department of Defence had warned it was under intense pressure due to the need to respond to “near persistent” natural disasters, and noted “the impacts of climate change” when requesting more cost-effective ways to manage the continual call-outs.

The federal government is now in the process of helping state governments buy out some home owners in low lying, flood prone areas. Equally, we haven’t really even started to talk about what the cost to damaged infrastructure might be from the widespread flooding, and how those costs will hit different levels of government.

Defence force personnel carrying debris in Lismore
Australian Defence Force personnel help with the clean up after the March floods in Lismore.(AAP: Jason O’Brien)

The cost of natural disasters is on top of the ongoing costs of COVID-19 to the economy — and the budget.

There is something of a morph from shock to persistent problem happening in the economy and the budget.

Treasurer Jim Chalmers spoke this week of how the world was bracing for a third downturn in the course of the last decade and a half.

“The first one, the global financial crisis, was a financial shock that became a demand issue,” he said. “The second one was a health shock which became mostly a supply issue.

“This one is an inflation shock and the risk here is a hard landing around the world brought about by the blunt and brutal but in some ways necessary tightening of monetary policy that we’re seeing, particularly in the big, advanced economies.”

The shockwaves are expected to morph

Neither of the first two shocks just came and went, of course.

The after-effects of the GFC on the financial system, and on government budgets, are still with us. As are the impacts of dealing with a pandemic.

But the impact of this latest shock is different not just because all of those previous interventions have constrained government capacity to alleviate its impact, but because the shock waves are expected to not just continue, but morph.

“The Treasury’s current expectation is that a bigger and bigger part of this inflation problem over time will be what happens with power prices,” Chalmers told journalists in Canberra this week.

A middle-aged white man in a dark blue suit speaks to reporters in a hallway.
Treasurer Jim Chalmers said he thinks electricity prices will be the “most problematic” aspect of Australia’s inflation problem.(ABC News: Ian Cutmore)

“Inflation has a number of constituent parts. Shipping costs have been a concern, supply chains have been a concern, the labour shortages are an ongoing concern.

“But electricity is the one that I think most about. I think it is going to be the most problematic aspect of it, of our inflation problem over the course of the next six or nine months”.

ACCC chairwoman Gina Cass-Gottlieb told a parliamentary committee this week that the median household electricity bill is up by $300 or 25 per cent since April and there are now forecasts prices will go up 35 per cent next year.

Australia has not suffered quite the energy price shock that has hit some overseas markets. But that is of little comfort to either households or policy makers.

Delivering on election promises is now trickier

Perhaps because Australia has not suffered the energy price shocks experienced overseas, and because we are benefiting from the higher prices on sales of our energy, the IMF isn’t predicting Australia will go into recession in the immediate term, even as things are looking exceptionally grim overseas.

But it is little wonder Chalmers has been so spectacularly downbeat as he has tried to set expectations for the economy — and the budget — in less than two weeks’ time.

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