The true cost of the bushfires
Opinion: $2 billion or $100b? The economic impact of the Australian disaster depends what you are measuring, writes Tom Pullar-Strecker.
We’ve smelt the smoke that has drifted across the Tasman, but will New Zealand choke on the economic fall-out from Australia’s bushfires? The fires are above all an ecological and human disaster that has claimed the lives of hundreds of millions of native animals, perhaps two million sheep and cattle, and 28 people.
But seven analysts from crediting ratings agency Standard & Poor’s sounded remarkably chilled at a briefing on Wednesday when they lined up to assess the dollar-impacts.
The bushfires had now burnt an area the size of England, or 1.2 per cent of Australia’s land mass, director Michael Vine said.
Kiwis have a vested interest in trans-Tasman insurers not burning through too much of their capital or reinsurance over the ditch, as we rely on them for earthquake cover.
Vine expected insured losses from the bushfires, which stood at A$1.4 billion (NZ$1.5b) from 14,000 claims, would end up approaching A$2b.
But on that measure it would only be Australia’s 10th most-costly disaster, way behind the eastern Sydney hailstorm in 1999 that racked up claims of more than A$5b, he said.
‘‘Their risk appetite is already attuned to earthquake, cyclone and bushfire type risks. This would not derail or change the appetite for coverage in Australia and New Zealand,’’ he said.
That may be assuming, optimistically perhaps, that the crisis is seen as essentially a ‘‘one-off’’.
Neither does S&P expect a sizeable, broader impact on the health of New Zealand’s secondlargest export market.
Fellow analyst Anthony Walker cautioned it was still very early days, but forecast the hit on Australia’s GDP would be ‘‘towards the bottom end’’ of a range between 0.1 per cent and 1 per cent.
That is in line with a 0.2 to 0.5 per cent (A$3.8b to $9.5b) drop estimated earlier in the week by Westpac.
‘‘What we expect to see is in quarter one and quarter two, GDP may be a bit weaker than we would otherwise have seen, but this will be offset by a pick-up during reconstruction phase.’’
It was important to remember where the bushfires were located, in regional Australia, Walker said.
‘‘When a disaster hits a heavily populated city there is usually a bigger shock.’’
Indeed, S&P’s analysts rattled through all the major sectors covered by its ratings – banks, insurers, big businesses, utilities, miners, state governments – and consistently estimated the impact on the credit-worthiness as generally low.
Perhaps its most upbeat assessment was that the impact on Australian tourism, airlines and airports would be ‘‘transient’’.
Senior director Pavarthy Iyer expected subdued international travel into Australia during the first quarter of the year, but he forecast a ‘‘double-digit’’ recovery as things came back to normal.
Not all economists think that is likely to be the full story.
Queensland University economics professor John Quiggin says GDP as a measure in this context is ‘‘almost useless’’.
‘‘We burn down half the country, throw a million people out of work, put them back to work
rebuilding stuff and there is zero change in GDP.
‘‘In essence as long as the Reserve Bank does its job, GDP growth remains more or less the same.’’
But he believes the bushfire could cost at least A$100b if a price was put on the cost to human health and ecosystems, and that does not include the cost of any broader policy reaction to strengthen Australia’s response to climate change.
‘‘One way of looking at it is we spend billions of dollars trying to save these ecosystems and now they are gone.’’
The impact on tourism is likely to be significant and long-lasting, he believes.
‘‘Everyone in the world has seen a bunch of stuff saying ‘Australia is burning and in all probability it is going to burn every year from now on and it’s their own fault’ and if you come to Australia and go to the beach you might end up being evacuated by sea.
‘‘I can’t see how that is going to be a transient effect.’’
If Quiggin is right and Australia experiences a steeper, longer-term drop in tourism, that in itself could have a range of knock-on consequences for New Zealand.
To the extent that New Zealand is seen as a complementary destination to Australia that impact could be negative, or if New Zealand is seen as both a rival tourism and emigration destination there could perhaps be an increase in arrivals.
Either way, any increase in discounting by Qantas or other international airlines flying into and out of Australia might cost Air New Zealand some profit margin.
But the far greater economic unknown is the degree to which the bushfires end up accelerating the public policy response to climate change in Australia in New Zealand, and the flow-on effects of that for businesses and consumer confidence.
After observing the criticism of Australian Prime Minister Scott Morrison for his handling of the bushfire crisis, New Zealand’s National Party must surely be thinking it made a prudent political decision backing the Zero Carbon Bill in November.
Now it may need to decide whether it would also be wise to tone down some of its more strident criticisms of the practical steps that are being considered to attempt to achieve the country’s emission-reduction targets.
Those steps will inevitably include higher carbon prices and sacrifices to accelerate the greater electrification of transport and industrial heat.
Doubling-down on the fanciful concern that there is any imminent risk of New Zealand doing much more than its fair share on climate change may be looking less appealing since the Australian bush caught fire.
The far greater economic unknown is the degree to which the bushfires end up accelerating the public policy response to climate change in Australia in New Zealand.