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Thu 16 Jan 2020 02:07 PM

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Australia counts the economic cost of the bushfires

The indirect impact of smoke haze and its effects on consumer confidence may be more pervasive and difficult to quantify.

Australia counts the economic cost of the bushfires
A fire burns from back burning as firefighters prepare ahead of a fire front in the New South Wales town of Jerrawangala on January 1, 2020. - A major operation to reach thousands of people stranded in fire-ravaged seaside towns was under way in Australia on January 1 after deadly bushfires ripped through popular tourist spots and rural areas leaving at least eight people dead. (Photo by PETER PARKS / AFP) (Photo by PETER PARKS/AFP via Getty Images)

While the direct impact of Australia’s bushfires on its economy is small, the indirect impact on tourism, retail spending and construction could be larger and may be harder to quantify.

The fact that the bushfire season will only end in March creates uncertainty over future total costs. However, the drag that this will impose on economic growth increases the likelihood of a central bank rate cut in February. 

Australia has had extensive bushfires over the past months; estimates from the Rural Fire Service indicate that 16m acres, or 0.8 percent of Australia’s land mass, has been burnt.

While Australia is no stranger to dry weather, the current season is historically extreme, with the south-east experiencing the driest three-year period on record. Rural/regional areas, which have thus far borne the direct brunt of the fires, are a small part of the overall economy and account for around 2 percent of gross domestic product (GDP).

Although this suggests limited impact to the economy, we note that the indirect impact of smoke haze and its effects on consumer confidence may be more pervasive and difficult to quantify.

The ANZ-Roy Morgan consumer confidence Rating sank to a 4-year low in early January, and estimates from some quarters of the street indicate that a 10 percent reduction in tourism for affected regions could amount to AUD1.3bn.

For now, there is general consensus that the bushfires are likely to weigh on GDP growth for Q4 2019 and Q1 2020, possibly by up to 0.25ppt per quarter.

This could make a rate cut in February from the Reserve Bank of Australia, which already cut rates three times last year to a record low of 0.75 percent, more likely. 

* Jen-Ai Chua works at Equity Research Asia, Julius Baer