Up In Smoke: Australia’s Bushfires Darken Economic Outlook

Australia

Australia is counting the cost of climate change, as “unprecedented” wildfires (known locally as “bushfires”) wreak havoc not only on humans and animals, but also on the economy.

As of Sunday local time, 28 people had been killed and over 2,000 houses destroyed in the record-breaking bushfires that have burned more than 20 million acres (8.4 million hectares) – an area equivalent to the size of South Carolina or Scotland. More than a billion animals are estimated to have been killed too, including threatened native species as well as thousands of livestock.

Yet in addition to the human and animal tragedy, the economic impact is also set to be significant and long lasting.

Moody’s Analytics has estimated the economic damage will exceed the record A$4.4 billion (US$3 billion) set by the 2009 “Black Saturday” blazes in the state of Victoria, which killed 173 people as they tore through rural areas north of Melbourne.

More than A$1 billion of insurance claims have already been lodged as a result of the fires, with claims expected to further rise as the bushfire season continues.

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While previous bushfires have tended only to hurt those local economies directly affected, the economic impact will be broader this time, according to Moody’s economist Katrina Ell.

“..The risk of there being broader macroeconomic spillovers this season are high given the scale of the fires, as well as the fact that it is still early in the bushfire season and the existing fires are yet to be contained,” she said.

The economist pointed to the direct impact on industries such as agriculture and tourism, together with the broader effects of air pollution, which has affected 30 percent of the population, causing “reduced worker productivity, increased health spending, and lower crop yields.”

The recovery coordinator for the southern state of New South Wales, Dick Adams, described the local impact: “Eden has lost their [paper] mill, Mt. Selwyn has lost their whole [ski] resort, softwood plantations in Tumut, dairy in Bega, apple orchards in Batlow [are gone].”

Despite pledges of financial assistance from government, such industries could take years to recover even if evacuated residents all return. For example, Tumut’s pine plantations are expected to take 20 years to regrow, while the apple orchards could take five years.

Tourism has suffered both locally and internationally as the suffocating smoke turns visitors away and harms locals, with road transport, communications, and power badly affected.

On January 10, Eyre Highway, the only sealed highway linking eastern and western Australia, reopened after being closed for 12 days due to bushfires. The Kings Highway linking Canberra with the south coast is expected to be closed for most of January, while the Princes Highway on the east coast has been shut numerous times.

Canberra hotels have reported bookings dropping by around 15 percent this month due to the bushfires, and in the wake of headlines that the city had recorded the world’s worst air quality levels.

On New Year’s Day, air quality index readings at one site in in the nation’s capital peaked at 7,700, nearly 40 times more than the “safe” level of below 200.

Further north, images of Sydney, Australia’s largest city, smothered in a brown smog have badly dented the “clean and green” image Australia seeks to project internationally. An international advertising campaign featuring pop singer Kylie Minogue has been suspended, with Australian Tourism Minister Simon Birmingham pleading to tourists that the nation “is still open for business.”

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This followed a warning by the U.S. Department of State that travelers should “exercise increased caution” and consider postponing visits to affected areas.

Budget Surplus Risked

For the federal government, a projected A$5 billion budget surplus for fiscal 2020 appears under threat as it confronts the cost of the bushfire crisis.

On January 6, Prime Minister Scott Morrison announced an initial A$2 billion in funding for the newly established National Bushfire Recovery Agency, with further emergency spending and other measures including employing defense personnel to assist evacuees likely to narrow the projected surplus substantially.

After previously having given an “iron-clad” commitment to deliver a budget surplus, Morrison told reporters that “the surplus is of no focus to me. What matters to me is the human cost and meeting whatever cost we need to meet.”

In a January 8 report, Capital Economics estimated the bushfires could curb first-quarter gross domestic product by around 1 percent, due to their impact on agricultural output, construction activity, and tourism.

“The bushfires probably magnified the drag on agricultural output from widespread drought as crops were burned and farm animals perished,” the London-based consultancy said. It noted a December projection by the Australian Bureau of Agricultural and Resource Economics and Sciences that agricultural output would fall by 3 percent in fiscal 2020, not including this year’s bushfire damage.

“The devastating social impacts of the fires mean that already-fragile consumer confidence will take an added hit,” Moody’s Ell added.

“The Australian consumer was already shying away from discretionary spending and the widespread air pollution and devastation are further deterrents.”

Signs of faltering confidence are already apparent. The ANZ-Roy Morgan Australian Consumer Confidence survey for the first weekend of January fell to its lowest level in more than four years, at a time when consumer spending is already weak.

AMP Capital chief economist Shane Oliver has estimated the bushfires could cut between 0.25 percent and 1 percent of GDP growth this year, compared to recent GDP growth of just 0.4 percent in the latest quarter.

“That could take us perilously close to zero or below that for a quarter,” he said.

ANZ Research however has been more cautious, projecting a decline of around 0.1 to 0.2 percentage point per quarter, citing the benefits of insurance payouts and increased government spending.

However, it noted that “there might be a case for a monetary policy response if the fires trigger ongoing national effects, such as a sustained loss in consumer confidence.”

The recent bushfire crisis follows record high temperatures, with Australia’s Bureau of Meteorology reporting that 2019 was the nation’s hottest year on record. With climate change expected to drive more deadly heat extremes, Canberra could face a growing damages bill and greater pressure to curb greenhouse gas emissions.

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Amid criticism of the government’s climate policy, Morrison appeared to soften his stance Sunday, indicating that the government’s emissions reduction policy would “continue to evolve to meet our targets.”

For the driest continent on earth, the bushfire crisis should dispel any sense of complacency over global warming as Australians come to grips with the human and economic costs.

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