Putting a price tag on a bushfire: the cost and the stimulus

14 January 2020

AUSTRALIA – As bushfires continue to rage across the lower eastern coast of Australia, economists are beginning to put numbers on what they think the likely hit to an already weakened economy will be.

But — there is always a but — disasters can be followed by a long tail of recovery as communities rebuild and infrastructure is repaired.

With a federal government promising to spend a minimum of $2 billion on rebuilding, the bushfire may have a stimulatory effect on the economy later in the year.

As Stockhead reported in December, the prospect of government stimulus or unconventional monetary policy from the Reserve Bank (RBA) to support a stagnating economy was looking increasingly likely before the scale of the bushfire emergency hit the public consciousness anyway.

The bushfire emergency is forcing the government to open its coffers early and a possible side effect is a much needed stimulus for the national economy.

The extent of the fires so far

As at January 8, over 10.7 million hectares had been burnt so far in Victoria, South Australia, New South Wales, Queensland and Western Australia. That doesn’t include fires in Tasmania early in 2019.

More than 5900 buildings have been destroyed (including over 2200 homes) and there have been 29 known fatalities.

The federal government has promised an extra $2 billion for a new national bushfire recovery agency to assist the rebuild of homes and critical infrastructure destroyed in the bushfires, and $50m towards helping bushfire-affected wildlife. NSW has committed $1bn.

Millions of dollars have been privately donated, or pledged, for immediate relief efforts and for longer term rebuilding.

Although the environmental destruction has been massive and the number of lives lost rising, as yet this is not the worst bushfire season in Australia, although it is the worst in recent memory.

The Black Saturday fires in Victoria in 2009 killed 173 people and are estimated to have cost $4.4 billion.

The 1973-74 season saw more land burnt — 117 million hectares or about 15 per cent of Australia’s land mass.

Westpac economists have put a $5 billion price tag on the economic cost, both insured and uninsured, of these fires.

As of Friday, the number of fire-related claims stood at 10,550 and were worth $939m, the bank said.

Taking the worst hits

The industries being hit now are farm and farm service suppliers such as Vitalharvest (ASX:VTH), foresters like Kangaroo Island Plantations (ASX:KPT), miners, insurers, banks as out-of-work people can’t pay mortgages, and tourism.

“The bushfires will have an impact on the economy as funds are diverted to the relief effort and we will see agricultural output fall in the short term,” Janine Cox, senior investment analyst at Wealth Within, told Stockhead.

“Initially there is a negative impact on jobs in fire affected areas.

“What we cannot measure right now is the impact on tourism in Australia. Graphic images of the bushfires and smoke will mean international tourists are likely to choose alternative destinations for holidays in the coming months.”

She argues the social impact of people becoming more fearful will also have an impact on consumer spending.

Womenswear retailer Noni B (ASX:NBL) said yesterday that 277 of its 1389 stores across the country had been “directly impacted” by the fires, and this resulted in an 8 per cent drop in comparable sales for the December half.

Analyst are warning to expect more bushfire-related downgrades at listed retailers.

Although the fire season is not over by any means, bushfires could shave 0.1-0.2 percentage points off March quarter growth, says Frank Uhlenbruch, an investment strategist from Janus Henderson Investors.

He says the next RBA interest rates meeting in February will be “live” as the bank will need to consider whether this natural disaster will require it to drop rates even lower, or wait and see how governments’ recovery spending impact on the economy.

He sees another rate drop as likely before the May budget.

“Livestock losses will add to near-term inflation pressures via higher food prices (primarily dairy and meat),” he told Stockhead.

“Insurance premiums are likely to rise and have first round effects on the CPI via higher premiums and second round effects if these higher premiums are passed on via higher goods and services prices.”

Royal Bank of Canada analysts are estimating full-year real GDP growth of 2.1 per cent in 2020, down from 2.4 per cent, and a February rate cut to 0.5 per cent followed by another to 0.25 per cent — and quantitative easing — in early 2021.

But Wealth Within’s Cox also said the ongoing drought had had a far greater impact on the economy.

The RBA in August 2019 warned the cost of the drought could touch $12 billion, while the fires have added to severe drought conditions that themselves have subtracted 0.2 per cent from GDP.

Stimuli?

Natural disasters take an immediate toll on communities and businesses, but recovery efforts — if promises of cash and aid come through — can provide a strong boost to local economies.

Tradies are immediate winners, as houses, roads and other physical infrastructure need to be rebuilt.

“The economy will be the winner over the next few years as the relief effort will have a positive impact on the economy with a boost to construction, roads, power and other services supporting the reconstruction which will bring jobs and require greater demand for materials,” Cox says.

She also believes healthcare services will be in demand.

RBC Capital Markets macro rates strategist Robert Thompson says the immediate hit to first half growth will be followed by a slight uptick later in the year.

“The hit to H1 growth is followed by a slight boost in later quarters with the initial damage to infrastructure, agriculture and other regional business via lower investment and employment somewhat balanced by later boost to government spending and private reconstruction/recovery efforts supported by insurance payments and some lift in consumption,” he wrote in a note.

Giving up the surplus dream

Most interesting is the government’s response.

Gone is the strong language around the need for a budget surplus, replaced by Prime Minister Scott Morrison’s comment last week that “the surplus is of no focus for me whatsoever”.

The Liberal government has already pulled forward about $3.8 billion worth of infrastructure spending to counter lukewarm growth.

Thompson says the bushfires may spur federal government spending and bond issuance into FY20-21 and some fiscal loosening in the May budget, which would be a positive for growth.

“A fiscal response is already underway, and it could be portentous for the flavour of the federal FY20-21 budget in May,” he said.

“Additional government funding announcements total over $3 billion so far, including a federal package of $2 billion over the next two years and $1 billion from NSW, funded via capital reserves. Automatic transfer payments via unemployment benefits should also lift.”

While in 2018 the Centre for Disaster Management and Public Safety and Melbourne University found little measurable adverse impact from past bushfires on GDP, the fact that Australia’s economy was already teetering and the business community crying out for government spending may mean this disaster has a longer tail of recovery than expected.

14. January 2020/by GFMCadmin