BUSHFIRES UNLIKELY TO HIT ECONOMIC GROWTH: JPMORGAN
SOURCE: The Australian Financial Review
Death, destruction, loss of trading and big insurance claims from the devastating bushfire crisis won't necessarily hit gross domestic product, according to JPMorgan.
Sally Auld, JPMorgan's chief economist, has called into question the wider effects of the bushfires on the economy given the regions that have been affected.
She noted that the negative, direct effects of such disasters on GDP operate mostly through production lost from disruption to infrastructure and productive capital. However, at this point most of the fires have not been in areas that are significant production contributors to GDP.
"Significant bushfires, almost by tautology, occur mostly in non-productive, non-residential and non-cleared land," Ms Auld noted.
While forests, animals and orchards have been damaged, it is worth noting that while total agriculture and forestry production fell 6.1 per cent in 2019, it only took 0.1 per cent off GDP over the year.
Ms Auld noted that if densely populated areas like Canberra and Western Sydney were to become significantly affected, the GDP number may take a bigger hit.
The federal government on Tuesday committed $2 billion over two calendar years to help disaster-hit households and small businesses. Other economists such as AMP's Shane Oliver estimate the hit could swipe as much as 0.25 percentage points off GDP.
The insurance bill has already started to rise, with estimates from the Insurance Council indicating there have been $375 million in claims and that this tally is expected to soar.
Ms Auld noted that insurance claims do not necessarily hit the official GDP number.
Insurance has balancing effect on GDP
"Insurance sector estimates of the disaster’s cost similarly will be significant, based on previous such events, but are not an ideal way to proxy the GDP effect, given they sum the absolute values of both the GDP negative – compensation for lost output/income –and the GDP positive, [such as] cost of rebuilding/replacement," she said.
There could also be some positive contributions from the disaster.
"More fundamentally, there are also reasons to suggest some temporary offsetting positives to GDP, for example excess hours worked by public safety, administration, and defence personnel, and increased outlays by charitable organisations and government transfers," Ms Auld noted.
Sentiment key, but not historically reliable
The big hit may come in the form of consumer sentiment. The negative headlines and fear could further pull overall sentiment down, meaning that someone unaffected by the fires may be less willing to spend and lift consumption, which has been very soft.
"Bushfires have dominated the news, and so could drag on sentiment," Ms Auld said. "As we have shown recently, however, consumer sentiment indicators do not predict consumer behaviour well."
Ms Auld ran a model that captured the effect of a handful of tragedies and disasters in Australia and how that may have changed GDP, deliberately selecting events which did not affect local infrastructure in order to capture "sentiment effects only".
As such, the 2011 Queensland floods which hit coal production were not used in the model, but the September 11 terrorist attacks, the Bali bombings, the 2004 tsunami, and Black Saturday bushfires were.
"The results show – admittedly, acknowledging the arbitrary nature of this basket of events – no discernible impact on GDP in quarters including such tragedies," Ms Auld said.
Other economists have chanced their arm on just how much of an impact there will be.
AMP Capital's Shane Oliver said his base is closer to a -0.25 percentage point hit to the economy.
"This allows for a disruption in economic activity in affected areas, reduced tourist arrivals and weaker than otherwise consumer spending as the bushfires, smoke and news of the impact on many Australians adversely affects consumer confidence and hence spending," he said.