Climatic or geopolitical events
Climatic or geopolitical events refer to things like natural disasters (such as droughts, floods or cyclones) or wars (such as the War in Afghanistan or the political turmoil experienced in the parts of Africa) that have an impact on the supply and cost of inputs used by industry. When there are unfavourable events of this nature (such as rising costs of agricultural production recently experienced in Australia due to the floods and cyclone Yasi) it results in an increase in the costs of production for those businesses relying on these inputs. This then results in an increase in aggregate prices and a negative impact on inflation. The rising prices result in slower AD, making it more difficult to achieve the government's goal for economic growth. The higher prices also damages international competitiveness and tend to place upward pressure on the CAD and NFL’s, making it more difficult to achieve external stability. With lower AD and economic growth, there is a lower demand for labour causing a decrease in employment growth and a rising unemployment rate, making it more difficult to achieve full employment. With higher unemployment, or lower employment, there is likely to be a greater reliance on welfare, leading to a less equitable the distribution of income.
CYCLONE YASI AND THE FLOODS IN EASTERN AUSTRALIA SINCE 2011
The devastating floods and cyclone Yasi that affected eastern Australia in early 2011 are prime examples of 'supply shocks' to the economy, causing the AS curve to shift to the left, and resulting in higher inflation, lower rates of GDP and higher unemployment in the short term. These two natural disasters had significant impacts on agricultural output (such as bananas, cotton, sugar and potatoes), mining production (such as disruption to supply potential at Queensland coal mines) and tourism (particularly in Queensland coastal towns). These disasters were responsible for the 1.2% decline in real GDP growth in March quarter of 2011. Treasury estimates suggested that the cost to the economy was $12B, with the bulk of the impact being felt by the mining and agricultural industries. It is estimated that the floods and cyclone subtracted 1.7% from Australia's growth rate at the time.
In 2013, the floods in Queensland and bushfires affecting many other parts of Australia also had negative effects on economic growth in the couple of months of 2013. Whilst the March 2013 quarter will bear the brunt of lower real GDP figures, growth in real GDP in the second half of the year should expand. This is due to the rebuilding and reconstruction effort that requires substantial Investment in buildings, houses, roads, bridges and other infrastructure items. So whilst the supply shock caused by a natural disaster will shift the AS curve to the left, the rebuilding phase should help to push the AD to the right (e.g. via higher investment) - having real implications for inflation over the medium term. Once the rebuilding phase is complete, however, the AS curve will shift back to the right, helping to contain inflationary pressure over the longer term.