Bushfires to hit GDP by at least 0.4% in Q1: AMP

The Australian bushfire season has now reportedly destroyed more than 7 million hectares of bushland since September 2019, claimed the lives of 25 people and caused countless damage to wildlife, livestock and communities.

With more than 200 fires still burning and emergency procedures in place in several states, the widespread view from economists is that the economy will be dragged down by the crisis, making a February rate cut increasingly likely.

According to Shane Oliver, AMP Capital’s chief economist and head of investment strategy, the damage to property and wealth flowing from the bushfires “will likely run into many billions”.

Mr Oliver noted that the Victorian Black Saturday bushfires are estimated to have cost $4.4 billion, and the current fires have covered an area 15 times bigger.

“The fires have been very widespread, have been going on for several months now and the crisis is continuing, so there will be a significant short-term negative impact and it likely will involve more than a short-term disruption to economic activity,” he said.

The economic hit comes from disruptions to business, particularly agriculture and farming, as well as reduced tourism activity and subdued consumer spending.

Mr Oliver estimates that the cost of the bushfires could knock “around 0.4 per cent” off GDP in the December quarter, but will mainly impact the March quarter.

He adds that GDP could tick up again in June, when rebuilding may start again, but – should the fires continue over the remainder of the summer – the negative impact on GDP could be as much as 1 per cent.

Mr Oliver continued: “With the bushfires likely to contribute to a flow of weak economic data for the next several months, questioning the RBA’s ‘gentle turning point’ in the economy and resulting in a movement away from the achievement of the RBA’s full employment and inflation goals, the fires have only added to the pressure for more policy stimulus.

“We remain of the view that the RBA will cut the cash rate to 0.5 per cent in February (with the market probability now up to 53.4 per cent from a low of 36 per cent before Christmas) and to 0.25 per cent probably in March,” he said.

Katrina Ell, economist at Moody’s Analytics, also noted that the direct economic costs from the blazes have been severe.

As of 6 January, almost 6,000 insurance claims amounting to $375 million were related to the bushfires that have ravaged since November, according to the Insurance Council of Australia. 

Moreover, Suncorp revealed this week that its costs for claims made in the first five days of January 2020 – during which states of emergency were declared in Victoria and NSW due to the fires – are already estimated to be between $75-105 million.

The total damage bill for Australia as a whole is set to rise significantly as the full scale of devastation reveals itself, with numerous fires still burning and yet to be contained. 

“Odds were already high that the Reserve Bank of Australia will cut interest rates at its next meeting, in February, to bring the cash rate to 0.5 per cent,” Ms Ell wrote.

“The fires increase the odds.”

Saxo Bank has also taken this view, with Australian markets strategist Eleanor Creagh expecting that the RBA will further decrease the rate once more in the coming year to 0.25 per cent.

“Raging bushfires, and a now resilient Aussie dollar lifting off support levels, will only add to the ongoing pressure on the RBA, particularly whilst the government continues to sit on the sidelines leaving the heavy lifting to the central bank,” Ms Creagh said.

“The domestic outlook will continue to place downwards pressure on the currency’s recent rally and bond yields.” 

Ms Ell added that, for now, it is too early to determine if the fires will lead to further monetary easing measures – with the blazes still burning and government responses still being fully realised. Fiscal policy also tends to be “more appropriate” than monetary policy, she added.

“The risk of adverse spillovers to the broader economy [is] high given the scale of the fires as well as it being still early in the bushfire season,” Ms Ellis said.

“This bushfire season has months to run and could easily surpass the most costly recent fires, the Black Saturday fires in Victoria in 2009, which cost an estimated $4.4 billion,” she said.

Ms Creagh likewise warned: “These impacts are not just a one-off, longer-term effects of a warmer Australia will continue to pressure agricultural productivity, tourism and other industries,” she said.

“A continued increase in frequency of extreme weather-related events poses a long-term risk for the economy.” 

The federal government has already committed an additional $2 billion for bushfire recovery for the next two years, with the NSW government committing an additional $1 billion. 

However, the total costs are “likely to be much greater than this given assistance under existing disaster programs, extra expenses associated with fighting the fires and the impact of slower growth in the short term on revenue flows,” Mr Oliver said.

He concluded: “More broadly, given the hit to confidence, a circuit breaker is arguably needed to help boost economic growth. Monetary policy alone is unlikely to be enough. So, there is a need for a broader fiscal stimulus – maybe in the form of a bring-forward of the personal tax cuts, an increase in Newstart and broad-based investment allowances. To have an impact, it needs to be at least 0.5 per cent of GDP (or around $10 billion).

“Rightly, in the face of the pain caused by the bushfires, the government has relaxed the focus on achieving a budget surplus, and it is now questionable as to whether it will be achieved this year and next. That is not a major problem in the relative scheme of things, given the relatively good state of Australia’s public finances,” he said.

However, Mr Oliver noted that there we some “longer-term challenges” such as increased political pressure to adopt a tougher stance in reducing carbon emissions, and the risk that this bushfire season is “the new normal”.

[Related: Brokers join forces to launch bushfire appeal]