Australia’s bushfire emergency – an economic overview

Below is preliminary analysis from Westpac Economics on the economics of the current bushfire crisis:

Summary

  • Bushfires are currently affecting large parts of south eastern Australia with elevated risk of further fires in coming weeks.
  • We estimate total losses to date are likely to be around $5bn – higher than the 2009 bushfires in Victoria but smaller than the Queensland floods in 2010-11.
  • The economic impact is highly uncertain. Activity in the most severely affected areas accounts for around 1% of the Australian economy and is focussed on agriculture and tourism.
  • Initial indications suggest the main direct negative impacts will be on local tourism activity with potential disruptions from smoke pollution affecting the major capital cities. Indirect effects through a hit to confidence and impacts on the wider tourism industry are much harder to assess but could be similar in scale.
  • Our balance we see a total GDP impact of 0.2-0.5%.

Insurance figures suggests 2019 similar to 2009

The Insurance Council of Australia declared a bushfire catastrophe on Nov 8. As at Jan 10 there have been 10,550 claims lodged with an insured valued of $939m. The Council estimates that 1,838 insured homes have been destroyed within the fire region.

By way of comparison, the most recent large bushfire disasters in Australia were in 2009 (the Black Saturday fires in Victoria) and 1983 (the Ash Wednesday fires in Victoria and SA). The 2009 fires saw 2,029 homes destroyed, and the 1983 fires saw 3,700 homes destroyed. Both resulted in insurance losses of $1.8bn (in 2017 prices).

A rough rule of thumb for disasters is that the total cost – including both insured and uninsured losses requiring government assistance – is about double the insured loss.

Total cost of the disaster to date likely to be ~$5bn

Initial estimates suggest the cost of the disaster to date is comparable to the ‘Black Saturday’ fires in Victoria in 2009, which saw 2,029 homes destroyed but a much higher loss of life. That would put the cost in terms of insured and uninsured losses at around $5bn.

Note that this is smaller than the impact of the 2010-11 Queensland floods which had an estimated total cost of $6.4bn. Bushfires in general tend to incur less damage than other disasters due to the more localised nature of the event.

Much of the loss associated with bushfires will be met by insurers.

Alongside this, the Federal government has designated $2bn over two years to help rebuild bushfire affected regions. It can also draw down $150mn a year (possibly more) from a $3.9bn Emergency Response Fund created in the April budget. The NSW state government has also allocated $1bn over two years to help rebuild affected areas.

Economic impact highly uncertain

Assessing the economic impact of disasters is always very difficult, particularly when the full extent of damage is still unknown.

There are additional challenges in assessing the impact of the current bushfires stemming from:

  • pre-existing drought conditions
  • many agricultural producers would have already been operating at low levels;
  • complex seasonality – including a mix of low activity for businesses that close over the holiday period, high activity for most tourism operators and diverse patterns within the agricultural sector;
  • smoke haze over major capital cities
  • an element that has not been a prominent feature of previous bushfires.

Adding to this, previous major bushfires in 2009 and 1983 also coincided with major economic developments, the GFC and early-80s recession, that make their impact difficult to quantify.

A negative shock followed by rebuild stimulus

It should be noted that the standard profile of the economic impact of most disasters is an initial negative shock followed by a positive shock as recovery and rebuilding occurs.

The size of the negative shock typically relates to the extent to which regular activity is disrupted – i.e. reflecting both the scale and the duration of any disruption. Both are heavily influenced by the damage to infrastructure – power, transport, water etc. Bushfires typically result in less damage to infrastructure than other disasters although this is an aspect that bares close monitoring with key risks around power transmission, transport and the potential contamination of water supplies.

The period of above trend economic activity that follows typically relates to rebuilding, particularly housing, much of which is insurance funded and comes through gradually. Initial figures suggest this could add about 0.3-0.5% to new dwelling completions over a two year period.

Most severely affected area ~1% of economy; agriculture & tourism focussed

The most severely affected areas account for about 1% of the Australian economy, the wider regions around these areas is closer to 3.5%.

Agriculture and tourism are the dominant sectors – directly accounting for 16% of total employment in the wider areas. This is likely to be much higher once related sectors are included, i.e. agricultural suppliers and processors, tourism-linked retailing etc.

The wider area accounts for a particularly high share of dairy production, accounting for 22.7% of all dairy cattle in Australia, and incorporates some significant wine-making regions.

The wider tourism regions account for 7.2% of overnight visitors and 6.6% of tourism spending nationally.

Mining and utilities are also more prominent in the wider area. Building activity is about proportionate to population share.

Estimated economic impact: 0.2-0.5% off GDP

Population: 1mn in areas around major fires (4% of Aus) with 300k in most heavily affected postcodes (1.2% of Aus). Employment: 375k in areas around major fires (3.5% of Aus).

Direct impact small – applying crude population/employment ratios, assuming the broad region affected by bushfires accounts for around 2% of national GDP and assuming bushfires result in 75% below ‘normal’ activity and a recovery and rebuilding profile that returns activity to pre-bushfire levels by April this would result in a direct 0.1% reduction in annual GDP nationally.

Wider impacts on tourism, confidence and pollution disruption are much harder to assess. These could easily be of a similar magnitude and possibly larger – our initial assumption is of a combined effect in the 0.1-0.4% of GDP range.

That would give a total GDP impact of around 0.2-0.5%.

Estimated economic impact: timing and risks

Timing-wise, the main direct negatives will land in Q1 and could see a larger quarter to quarter hit of around 0.3% GDP in the March quarter. Wider effects on tourism and confidence nationally may come through more gradually. Repair and rebuilding work will provide a boost as the year progresses with the net effect likely to be a positive by year end.

While there are numerous uncertainties, we see the key risks to this assessment as being around:

  • The potential for further significant bushfire events in coming weeks particularly if these affect urban areas or critical infrastructure;
  • The size of the impact on the wider tourism sector;
  • The impact on consumer sentiment; and
  • The effects of smoke pollution on major urban areas.

Policy implications

Westpac expects the RBA to cut rates by 25bps at its February meeting with a further 25bp cut in June and a move to unconventional policy easing in the second half of the year – a view we set out prior to the bushfires.

While the bushfires may provide additional reason for the RBA to ease policy, particularly if consumer confidence is heavily impacted, it is unlikely to have a significant bearing on the RBA’s decisions.

The Bank’s response to the Queensland floods in early 2011 provides a clear guide. The Governor’s statement following the Board’s February meeting stated that: “In setting monetary policy the Bank will, as on past occasions where natural disasters have occurred, look through the estimated effects of these short-term events on activity and prices. The focus of monetary policy will remain on medium-term prospects for economic activity and inflation.”

Leith van Onselen

Comments

  1. PalimpsestMEMBER

    Thanks for sending through some of the initial economic assessment. My personal data-free expectation is that there will somewhat higher indirect effects due to the extensive spread of the fires. For example, there seems to have been a reduction in activity generally for retail (additional to expected) in SYD and CBR with people asked to stay indoors during the Christmas break. What will be particularly interesting to see is the potential effect on property prices right along the retirement and holiday home belt. The contrast between the economy and GDP will be unusually high – burning structures down then rebuilding them is great for GDP, but doesn’t really help the economy.

    • This is the big ticket item that far outweighs any localised effects.
      Retail, food and accommodation across a number of key centres (including Canberra) will be severely impacted by the smoke.

    • The contrast between the economy and GDP will be unusually high – burning structures down then rebuilding them is great for GDP, but doesn’t really help the economy.

      exactly
      economy is going to be hit hard long term even if GDP grows because of it …

  2. The work of our volunteer firefighters is explicitly excluded from these figures. Sure, the unpaid wages from their day jobs will decrease GDP, but other than that, the national accounts deem their efforts as worthless.

    The value of their labour, the avoided destruction of property, life and biodiversity – they’re all *explicitly* excluded. The pollination services of wildlife that helps sustain our agriculture industry, excluded. The value of communities rallying for those who have lost everything and more? Excluded. The destruction of thousands of properties does not decrease GDP, but their rebuild will increase it (perfect example of the Broken Window Fallacy).

    I’m not suggesting an alternative, just pointing to the gaping chasm of inadequacy that is GDP – particularly when it comes to counting anything that matters.

    • Exactly why I stopped volunteering. Being exploited to provide a necessary function of government for free. If we needed fire fighters and emergency services as a society it should be a service paid for by government, not meagre local government funding, charity and volunteer labour.

      • I’m sorry to hear you felt exploited. Volunteers should be protected and enabled, not exploited.

        There’s a fine balance between exploitation and necessary community service. My naive take is that remote/isolated communities necessarily rely on volunteers (due to the reactive/relative lack of demand for their efforts), while larger population centers need more permanent positions. An example where exploitation of volunteers is clear to me is where Victoria’s Country Fire Authority (CFA) operates well within the metropolitan boundaries of Melbourne – based on regional boundaries drawn in the late 1800’s. The metropolitan chapters of the CFA are a scam and they need to be disbanded.

      • Heard an insurance bloke on the radio saying there is a tax on every policy that woud be enough to fund all the fire fighting needed.
        ATMit is tipped into general revenue.
        Caution; he was an insurance industry spokespeaker.

        • I’m pretty sure ever fire service is funded from general revenue (rather than having funding legislatively set aside, or hypothecated). However, there’s a bunch of states that fund fire brigades from land levies that are driven by the their estimated funding needs – so, funding is *effectively* set aside for them.
          Victoria’s Fire Services Property Levy is one of them (among others, SA and NSW i think?), where yearly budgets are collected from almost all land owners. If the brigades need more/less at the end of the year, it’s balanced off by general revenue.

  3. Black Saturday killed the “stay or go” delusions. But business as usual sailed on.

    This time, punters were told to bolt early. But medium and long term responses are being almost 100% construed in terms of climate and energy policy. Nothing about unique carrying capacity, boring old soil and rain, population and water.

    It’s all totally righteous and full-on Greta, but it’s not profoundly evidence or science based. Science and media seem to riff on the Treasury and RBA song-sheets these days. Onwards to 50m, as Kev would have it.

  4. Disasters are always a net negative for an economy, irrespective of the fallacious ‘boost’ to GDP during rebuild. Were it otherwise, we could grow our economy by simply destroying productive assets and rebuilding on a perpetual basis ie. The broken window fallacy.

    • Agree. Also from people on the ground there will be little to no rebuilding of some towns far out west in rural areas.
      The environment is toast. Any rebuilding is done in vain. Its as simple as that. Coastal rural towns will regenerate and rebuild but will be under constant strain. Its not going to be easy

  5. Anecdotally, friends say they know of several shops that have closed in South coast villages due to loss of the summer seasonal trade. Regardless of GDP bullsh1t that’s people’s livelihoods gone.

    • HadronCollisionMEMBER

      TLDR the OP, but, did it account for lost income from burnt vineyards and orchards?
      Dairying beef and lamb income?

    • One would imagine that there were many businesses in many industries hanging on by the skin of their teeth before this bushfire season that have unfortunately been unable to survived the inferno (like many local species of plants and animals).

      The real cost is incalculable and will be paid over decades. Trauma such as this is multi-generational. In addition we are only halfway through this fire season, and WA and Tassie have burned at a lower level of intensity so far. Lets hope the immediate climate/weather drivers of the IOD, SAM and whatever else turn in our favour and those states get a reprieve from this catastrophic fire season.

    • McbobbingsMEMBER

      Long term forecasts are worthless. You can get accurate forecasts 7 days out, semi accurate 14 days out. From 14 days to 3 months it is impossible to get a daily forecast, only infer from what climate drivers are doing, i.e. the temperatures of the Pacific and Indian ocean. From 3 months onwards it is difficult to forecast even those, and you then rely on mega trends like climate change and solar cycles.

      The outlook for the next 3 months is neutral imo. Better than the dry dry dry of the past 18 months.

      • bolstroodMEMBER

        Thanks Mcbobbings,
        I was after the broad outlook, not day by day forcasts.
        We will need better than average rains to get us out of the Drought/ Fire/ Heatwaves/ Falling dam levels that we have at present.
        If not in the next 6 months we will be in dire straits

  6. McbobbingsMEMBER

    I think the biggest unknown in this crisis is the impact of smoke on Sydney and Canberra. Aside from obviously impacting cafes and outdoor businesses, from my perception in Sydney visiting Bunnings I feel as if foot traffic is down, as are people playing organised sport in parks. I imagine Canberra would be worse… There is a definite unease about smoke so I feel the impact will be stronger than expected

    • bolstroodMEMBER

      The pictures of the people caught up in the fires shows the stress that they are under, mental health, especially PTSD, will be a major concern in the weeks ,months and years ahead..

    • The other day in the comments I asked, “will the fires be Australia’s Black Swan?”

      Only time will tell.