Bushfires leave a terrible cost – but how big will it be?

Will Australia’s terrible bushfires produce a nasty economic aftertaste or will a phoenix somehow rise from the ashes?

It is an open question, with a surprisingly large divide in opinion ranging from an almost certain recession all the way through to a stimulation of the economy from the rebuilding phase.

The question is even more open when you consider that there is a very long way to go until the fire season is over and there is every possibility that things could get much worse from here.

Direct costs mounting and could include an interest rate cut

On the bearish side, some economists point to the economic cost of the bushfires themselves, which is estimated at around $2 billion and rising fast.

That cost alone could push the Reserve Bank to lower interest rates in February as a form of insurance against a quick fall into recession.

The fires have destroyed a massive amount of land – at least 10 million hectares and counting – and some of that land is directly productive while other parts such as national parks are essential to promote tourism.

While some of Australia’s economic statistics for late last year were starting to improve – such as building approvals and job vacancies – more timely data such as ANZ Bank’s consumer sentiment index which plunged to a fresh four-year low in early January and ANZ’s job advertisements which fell 6.7% in December, were pointing in the opposite direction.

Construction activity was also falling and, of course, there are direct losses such as the 27 lives lost so far and 2,131 homes, not to mention livestock and pasture.

Tourism could take a big blow from the fires

The loss to tourism which is our fourth largest export industry is difficult to estimate but it is safe to conclude that world-wide coverage of cities covered in smoke and the fires has not been helpful and may leave a negative impact for a long time.

He may have been slow to act initially but Prime Minister Scott Morrison has pledged $2 billion for a recovery fund and state governments have committed about $1 billion as well.

That is a serious amount of money but there are fears that is may not be spent effectively and over too long a period of time to have much impact.

Recession could be around the corner

On the most bearish measures, some economists are tipping Australia will tip straight into recession after the fires with GDP falling heavily over the next couple of quarters as a sharp negative impact is felt by agriculture and tourism, while consumer confidence and spending both fall.

AMP Capital chief economist Shane Oliver has estimated the bushfires would knock off 0.4% from March quarter GDP, which is equal to about $7.6 billion.

That could lead to a negative reading for the March quarter but Dr Oliver believes Australia will be saved from a second consecutive negative quarter – a technical recession – by high infrastructure spending, rising mining investment and rebuilding activity.

He is not alone in pointing out that the effects of the fires may not last as long or be as dire as they seem – at least in economic terms.

Economic activity could be stimulated by rebuilding after the fires

Demonstrating why economics is described as the dismal science, there are some solid reasons why the economic effect may not be too bad.

One is that after the fires there is a lot of economic activity that follows as insurance companies pay out claims, government payments flow and devastated areas begin to rebuild homes and businesses and furnish and outfit them.

It also needs to be remembered that most of the areas burnt out are very sparsely populated and produce very little in the way of direct economic output, so the damage is less severe than might be imagined.

What do the fires say about our long-term safety?

The real question though is perhaps not what the effect of the fires will be on economic output or GDP as to what they say about Australia’s long term safety and well-being – particularly if the climate change advocates are right and bushfires become more savage and common as our part of the world warms up and dries out.

That is a cost that is very hard to quantify, involving as it does predictions of future climate and the reaction of groups of people to those changes.

It is one thing to monitor changes in economic output through GDP, but quite another to include the future ability of Australia to remain home to our current human and animal populations.

Stern review still relevant 14 years later

That is one of the reasons why the Stern Review on the Economics of Climate Change way back in 2006 advocated for significant early investments to counter climate change as being not only sensible but necessary.

Noted economist Nicholas Stern argued that the benefits of strong, early action on climate change far outweigh the costs of not acting, when considering the effect on water resources, food production, health and the environment.

While his 700-page report was produced for the UK Government, the principles it espoused are widely applicable to all countries.

The cost of not acting at all, according to Stern, was at least 5% of global GDP being lost every year, potentially rising as high as 20% of GDP and more if other risks and impacts are included.

Fourteen years later the Stern report is still interesting reading and his idea of spending early to avoid bigger costs down the track still resonates.

Exactly what climate change actions and taxes are best is still an open question, but as Stern said and the Australian bushfires reinforce, the costs of not taking early action can be much higher further down the track.