Drought in South Eastern Australia

"In half an hour we will have Malcolm Turnbull on to explain to us the plan following the frightening news that some of our capital cities and especially Adelaide might run out of water. " Fran Kelly, ABC Radio National

I had to grin at this. Up to now, drought has really been seen as a rural problem. Now, suddenly, it has become a dominant issue on the metro media.

There is no doubt that we face a serious problem. However, being insatiably curious, I decided to dig down to see if I could find any of the source papers that the Prime Minister and the three Premiers considered at their emergency water summit. I will report on this in a moment. First I want to refer to two earlier stories to set a context.

On October 17 in Water, Drought and the Environment - working from facts I looked at the continuing importance of primary products to Australia's export trade, noting that our dependence on mining and agricultural exports had in fact increased in recent years. Then on 24 October in Australia's greatest drought - or is it our wettest period on record? I looked at the distribution of average rainfall across the country, noting that there were in fact two Australias, a south western third experiencing severe drought, a north western two thirds receiving above average rainfall.

With this is background, digging down I found the slides used by David Dreverman from the Murray-Darling Basin Commission to brief the PM and Premiers. The one thousand year claim is attributed to Mr Dreverman.

Look first at slide four. This shows rainfall distribution in south eastern Australia over the last nine months. You can see the edge of the rainfall divide between the dried and wetter Australia's I referred to in my second story.

The picture in south eastern Australia is not a pretty one. Here I was especially interested in the geographic distribution of the drought. To summarise the slide:

• The area experiencing the lowest average rainfall since records appears centred on the central and southern tablelands, slopes and immediate plains of NSW. This area includes Sydney's main catchment area, explaining the much greater Sydney interest this time in the effect of drought.
• There is a second area where rainfall is very much below average. This includes a large part of Southern Queensland including Brisbane's main catchment area. Then further south there is a broad sweep of country extending south and west from central NSW and then covering all of Victoria and the SE corner of South Australia including Adelaide.
• Then there is a further extensive zone of below average rainfall covering South Australia, any bits of Victoria not already covered, NSW and southern Queensland.
• Within south eastern Australia there is only one significant area that has received average rainfall, the north coast and eastern portion of the Northern Tablelands up to the Darling River watershed.

Now what does all this mean?

1. I haven't calculated it exactly, but the area includes something like 80 per cent of Australia's population. People in Brisbane, Sydney, Melbourne and Adelaide are all being affected at the same time, explaining why this has become such a broad based topic, why the politics of water and drought have shifted from the regional press to become an almost obsessive metro media interest.
2. The entire Murray-Darling basin falls within the drought affected area. Mr Dreverman's slides show the impact on water flows, the type of action that might have to be taken if the drought continues.
3. The area affected by drought covers some of our most productive land producing the majority of our grain crops from wheat to rice, of our wool, cotton and a significant proportion of our horticultural products.

I want to focus a little more on the last, extending earlier analysis.

Looking at the economy as a whole, we may be coming to the end of a fifteen year period of economic expansion. However, the income distribution effects of that expansion have been uneven. That explains why some groups in our community are so sceptical about the talk of boom times. They simply have not experienced it.

We talk about the Australian economy as though it is a single entity. For thirty years now I have been arguing that in fact the average that is the Australian economy conceals a large number of separate economies, that those economies have been diverging, and that we need to recognise these differences rather than always talking in terms of national averages.

I plan to talk about some of this in my confessions of a policy adviser. For the moment, I would simply note that I have had great difficulty in getting the message across because of the dominance of Sydney and Melbourne. Now, however, the fact that Sydney and Melbourne are stuggling while resouce rich areas continue to experience rapid growth means that the metro media is suddenly saying, hey, we have two economies and need to recognise this. We should not set our economic policies such as interest rates based on national averages.

Now trace through some of the economic effects of the drought.

On the international trade side, we have been running consistent deficits on the current account (exports of goods and services minus imports of goods and services) for a number of years. Because of our continued dependence upon rural exports, the fall in exports flowing from the drought could have a severe affect upon the current account balance. Other things being equal, a favourite economist phrase, this is likely to lead to a fall in the value of the currency. That will benefit export industries especially in WA, NT and Queensland, but will also increase inflationary pressures.

The income affect of the drought will be felt most strongly in NSW and Victoria. So far the discussion focus has been on the regional and rural centres. In fact, the income affects will flow through into the metro areas. I have not attempted to quantify this, but it is likely to be signficant.

There are also price affects associated with the drought. As a simple example, chicken prices in the supermarkets have already increased (I know this one because I am the chief cook and bottle washer) because grain prices have increased.

Now put all this together. The Sydney and Mebourne economies are already close to recession. While the official Australian unemployment rate (and the official rate always understates real unemployment because of the way it is calculated) is at the lowest level for many years, parts of Sydney and Melbourne are already experiencing much higher rates. In Sydney's Fairfield, for example, unemployment is over 10 per cent.

Sydney and Melbourne are caught in an economic squeeze. National economic policies such as this morning's interest rate rise necessary to rein in inflation, consumer credit and rapid economic activity in some parts of the country are already biting hard. The income effects of the drought will have flow-on effects on economic activity in both cities. Rises in prices associated with the drought, combined with price effects flowing from any reduction in the value of the currency through increased prices for both inputs and final goods, will further increase pressure.

I do not want to overstate all this. However, I find it interesting that so much of the discussion in Sydney and Melbourne on drought and water has largely ignore the short to medium term economic effects on the two cities.