The economic effect of Australia’s bushfires on New Zealand could be enormous

The economic effect of Australia's bushfires on New Zealand could be enormous

New Zealand is struggling with housing and infrastructure challenges, but they will become much worse if Australia’s bushfires result in mass transtasman migration here. 

The short-term effect of Australia’s bushfires on New Zealand is likely to be small but the long-term implications could be enormous, says ANZ chief economist Sharon Zollner.

“Australia has had drought after drought and at some point you have to start asking the question, ‘Is this just an incredible run of bad luck or is this the new normal?’”

Catastrophic as Australia’s bushfire season has been to date, economists are picking most of the negative impacts to be felt in consumer confidence, tourism and the affected regions, with only a small effect on the Australian economy overall.

ANZ Research expects Australia’s GDP to be down by 0.1-0.2 percentage points in the final quarter of 2019 and the first quarter of 2020. “This is necessarily a best first guess and will be refined as more information comes to hand,” says David Plank, ANZ’s head of Australian economics.

Westpac also says the economic effect of the fires is “highly uncertain”. The areas affected account for about 1% of the Australian economy, mostly in agriculture and tourism, the bank’s economists say in a just-released economic overview.

“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 harder to assess but could be similar in scale.”

Westpac expects a reduction in GDP of between 0.2% and 0.5%.

Luck has run out

Although the overall effect on economic growth may be modest, and the ecological impact disastrous, Zollner is inclined to agree with those who think the biggest effect – other than to those who have directly suffered personal losses – will be on the Australian psyche. In particular, she sees Australians questioning whether they are in fact in “the lucky country”.

“From a purely economic perspective, in the short term the impacts are probably not a game changer, not least because Australia, like New Zealand, is one of the most urbanised countries in the world,” she says.

The more interesting questions are how the fires and related droughts might affect trade and migration decisions over time.

“The number of New Zealand passport holders living in Australia is huge and every Australian has the right to move here. If the long-term pattern of people moving west [from New Zealand to Australia] changes direction, that is potentially a massive shock for the New Zealand economy.

“We’ve had very strong migration in recent years, and we’ve seen the effect that has had on house prices and the infrastructure deficit. Migration is a huge driver of the economic cycle and it’s providing most of our growth at the moment – but it’s not quality growth in terms of lifting living standards. It’s lifting asset prices such as house prices but is not the kind of growth that lifts well-being and wages for New Zealanders.”

Whether people will choose to migrate, and where they would choose to go if they did move, was uncertain, “but what is true is that most people estimate New Zealand will be less worse off because of climate change than many other countries, which makes it a more desirable place to live”.

“There are also very different scenarios for our housing market if Sydney moves to Auckland than if the Pacific Islands move to Auckland – in fact, if it’s as I suspect, there will be migration from both. It will be very interesting and we’re just at the start of something potentially very, very big.”

Uncharted waters

Aside from migration, Zollner thinks Australia will become a bigger importer of New Zealand-produced food, “because exporting food is essentially exporting water”.

“Australia is one of the largest virtual water exporters in the world in that regard, yet it has quite severe water shortages in some places and has desalination plants. It’s an interesting long-term question.”

Although most Australian dairy production is for domestic consumption, Zollner says it competes with New Zealand in global markets. Australian farms have been more affected by long-term drought than by fires, but both contribute to reduced livestock numbers and therefore less output at a time when global demand for dairy products remains robust.

For different reasons – largely to do with tighter environmental regulations – New Zealand is also not maximising its potential dairy exports. “It all feeds into the same theme, which is that even though China’s economy is not growing that well, global supply of dairy products is not keeping pace with demand, and that is supporting prices.”

Plank forecasts that a drop in tourism because of the fires will hurt affected regional areas but not be significant enough to influence national GDP. That’s because it is predominantly domestic tourists who visit the provincial areas, and also because domestic tourists can simply decide to stay home, whereas those who have booked from overseas usually cannot. About 93% of international tourist spending in Victoria and New South Wales is in Melbourne and Sydney, neither of which has been significantly affected by the fires. In terms of the future repercussions from slowing international tourism numbers, the evidence is not conclusive.

This view is supported by New Zealand’s largest independent travel agency, House of Travel. Its commercial director, Brent Thomas, says that for most New Zealanders travelling to Australia this summer, it is too late to change their itineraries.

But, based on previous experience, he expects bookings will be slower than usual for the winter season as people take a “wait and see” approach. So long as the fires don’t get worse and there are no other issues, he expects bookings will bounce back in about six weeks.

Support from New Zealanders would matter to Australians, Thomas says. “Long term, New Zealanders visiting Australia is one way of helping them recover.”

This article was first published in the January 25, 2020 issue of the New Zealand Listener.

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