The economic impact of Australia’s bushfire crisis

The economic impact of Australia’s bushfire crisis

According to reporting in the Australian Financial Review (AFR), Australia’s bushfire crisis is weighing on consumer confidence and the jobs market as the ongoing emergency takes its toll on economic activity.

Consumer confidence in decline

As reported in the AFR piece, Australia and New Zealand Banking Group (ASX: ANZ)’s monthly Australian job ads survey fell 6.7% in December in seasonally adjusted terms – its biggest fall since the 2019 federal election.

In addition, ANZ and Roy Morgan’s weekly consumer confidence survey declined 1.7% last week to its lowest level since 2016, based on respondents’ assessments of current and future economic conditions. According to ANZ’s head of economics, the decline actually understates the decline in sentiment since the start of the bushfire emergency, given the new year normally brings gains in confidence. 

“Between 2010 and 2019, the average gain in confidence for the first week of January has been 3.4%. Against the usual seasonal gain of recent years, confidence has started 2020 in very poor shape,” ANZ’s head of economics told the AFR.

Consumer confidence is an important factor in determining the willingness of consumers to spend, borrow and save. When confidence is low, consumers tend to borrow and spend less and save more. This can reduce levels of economic activity leading to economic downturn. In 2019, economic stimulus measures including tax and interest rate cuts were largely saved rather than spent by consumers, blunting their impact. 

Rising insurance costs

According to the AFR article, insurance costs are also certain to rise beyond the estimated $700 million in losses already submitted as the fires continue to burn across the country. Homes, farms, tourism areas, and public and private infrastructure has been destroyed, necessitating a complex and lengthy reconstruction effort.

Insurance Australia Group (ASX: IAG) reported receiving over 2,800 bushfire-related claims as at 2 January with the majority relating to residential property. Based on initial estimates, IAG estimates its net natural peril claim costs for the 6 months ended 31 December 2019 (1H20) will be approximately $400 million post-quota share. 

The Federal Government has committed $2 billion over 2 years to the bushfire recovery, although the final bill could be even higher. This will shrink the promised budget surplus but deliver much needed funds to communities and businesses devastated by bushfires. This increased government spending could act as a type of fiscal stimulus, although any impact is likely to be muted given it comes in response to a negative shock.  

The post The economic impact of Australia’s bushfire crisis appeared first on Motley Fool Australia.

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Motley Fool contributor Kate O’Brien has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of Insurance Australia Group Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

The Motley Fool’s purpose is to help the world invest, better. Click here now for your free subscription to Take Stock, The Motley Fool’s free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson. 2020

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