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-affected areas in northern Victoria, southern Queensland and all of NSW.
A new report by Commonwealth Bank has put the potential cost at $12billion and warned of food price hikes.
Dr Lowe told a parliamentary hearing earlier this month 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 depended ‘‘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.’’
He said in 2002-03 farm output fell about 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 $8billion and $12.5billion.
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.