Gottiboff: Bushfire boom imminent!

Gottiboff is excited:

There is increasing evidence that Reserve Bank Governor Philip Lowe and his people are significant contributors to the increase in pessimism by so many Australians.

…Now bushfire relief and recovery has given the government a justifiable reason to spend that surplus and more. The big bushfire spending proposals of the federal government may now give the Reserve Bank an excuse to stop rate cutting without admitting error.

…What looks like being triggered is a massive investment in replacing assets —much of that investment via insurance company funds —- and substantial Commonwealth investment in infrastructure. If it is done properly the budget will go into deficit and it will stimulate the economy.

Add that to the amounts set to be spent in reconfiguring our power supply network and the increase looming in capital city home building rates, plus existing infrastructure.

Accordingly we have on the slipway a major stimulation of the economy, albeit much of it replacing existing assets. Don’t be surprised if building costs rise along with the increase in food prices that will come with the bushfire damage.

Gottiboff perceives everything through the prism of his income-dependent readers.

It’s a shame to have to juxtapose Gotti’s drivel with Westpac’s excellent analysis but that’s what we need to do:

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.”

My own view is that the impacts of the fires will be materially more negative than the offsets as the fires destroy government credibility and push households to bunker for longer, and the very negative international press will hit tourism hard. To that extent the fires are likely to encourage the RBA into greater easing over time.

David Llewellyn-Smith

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