The Importance of Climate Variability and Seasonal Forecasting to the Australian Economy

Abstract

The underlying source of climate variability affecting the Australian economy is the fluctuations in agricultural production related to rainfall. Drought in the grain and extensive grazing industries is the prime contributor. As an introductory chapter in a volume on the Australian experience in applying seasonal climate forecasts, this chapter’s role is firstly to provide context by describing the major impacts of climate variability on the agricultural sector. The importance of the impacts from the perspective of the Australian economy is then reviewed. Production variability in agricultural industries and regions is described together with the flow-on impacts to the economy generally. The 1994–95 drought, which had large impacts on farm output and exports, is used as an example. Notwithstanding the relatively small size of the farm sector, these impacts can have significant but infrequent flow-on effects to the rest of the economy, and on major macro-economic aggregates such as economic growth and the volume of exports. The strong linkages between the farm sector and the rest of the economy, and no significant dampening of agricultural instability by the non-farm sector, both contribute to the impacts of climate variability on the economy.

Seasonal climate forecasts are being increasingly used to benefit decision-making in the more climate-sensitive sectors of the economy. The second role of the chapter is to provide a broad research context for applications of seasonal forecasting to manage risk arising from climate variability. Farmers are the major group of potential users, and they have identified more confident use of forecasts as a priority for research. Extensive but neglected research on how risky decisions are made is reviewed to look for opportunities for alternative ways of presenting probability information. The relatively recent impact of probabilistic thinking on human affairs suggests that the concepts are not intuitive. Alternatives could take account of research on biases in intuitive approaches, and thus contribute to greater confidence in the use of seasonal forecasts. The paper concludes that the communication aspects of seasonal climate forecasts warrant greater priority if the potential importance of the forecasts in improved risk management is to be realised.