GOLDMAN: This drought indicator just registered an ominous reading for Australia

Photo by Lisa Maree Williams/Getty Images

El Nino is here, and it’s a strong one, possibly a record-setter.

The weather phenomenon is typically associated with dry conditions during the Australian spring and can be a precursor of drought.

Analysts at Credit Suisse earlier this year estimated the El Nino event would detract 0.37% from Australia’s GDP. But a drought could have a more damaging impact.

Goldman Sachs says significant droughts in Australia have typically reduced Australian GDP growth by 0.5 to 1 percentage point, and notes a key weather indicator is now signalling a potential drought.

The Southern Oscillation Index measures air pressure fluctuations across the Pacific during El Nino events. This August, it registered one of its lowest five readings in 150 years. Here’s the chart:

Image: Goldman Sachs Asset Management

Goldman says “any reading below the -8pts threshold is typically consistent with a drought”.

There are lots of positive signs for the Australian economy right now: business conditions are at their highest levels in years and tourism is booming. But it’s still a fragile state of affairs, with the construction sector looking wobbly and business investment intentions low.

It’s too early to call a drought, and the El Nino drag on rainfall tends to ease during the summer, but with agricultural exports playing such an important role, the economy could do without a severe dry spell on the eastern seaboard.