Financial Impact Of 2019-20 Australian Bushfires

The Australian fires of 2019-20 brought acute environmental and economic damage to the continent. Following an extended period of abnormally dry, windy weather, Australia experienced one of its worst fire seasons on record. From September 2019 to January 2020, "bushfires" decimated an estimated 20 million acres, accounted for 25 human deaths and half a billion animal fatalities.^[1]

Aside from being an environmental catastrophe, the economic implications stemming from the fires were stark. Despite a population of 25 million residents, Australia ranks as the 19th largest global economy in terms of gross domestic product (GDP). In addition, it is the world's 22nd largest exporter, with metals, beef and wheat being the leading commodity goods. The fires of 2019-20 greatly disrupted exports, tourism and the domestic business atmosphere. As a result, dovish monetary policy and subpar economic growth undermined the Australian dollar's (AUD) forex valuations.

Cost And Financial Burden

Upon burning 20% of Australia's forests, the bushfires of 2019-20 forced mass evacuations, created severe air quality concerns and had a staggering economic impact. Analysts projected the total costs of the fires to be in the neighborhood of US$70 billion, a figure that includes provisions for fighting the fires, reconstruction, loss of tourism and other variables.

The losses attributed to destroyed and damaged assets proved to be severe. According to the Insurance Council of Australia (ICA), 9,000 claims worth US$483 million were filed by the residents of New South Wales, South Australia, Victoria and Queensland. The claims originated from the destruction of nearly 2000 homes and structures in affected regions.

Revenues from tourism were also negatively impacted. As of January 2020, the Australian Tourism Export Council (ATEC) estimated the sector would lose around AU$4.5 billion for the coming year. This figure was especially daunting as 3% of Australia's aggregate GDP is attributed to tourism.

To aid in recovery efforts, the Australian government took steps to help struggling citizens. In January 2020, US$1.4 billion in direct funds were pledged to firefighters, damage repair and the tourism industry. Although this amount was deemed by many as insufficient, it did provide some degree of relief to the hardest-hit economic sectors and regions.

Aside from government stimulus, the banking sector also got involved in helping those hurt by the fires. The "big four" domestic banks (National Australia Bank (NBA), Westpac, Australia & New Zealand Banking Group (ANZ) and Commonwealth Bank Australia (CBA)) pledged a total of AUD$8.5 million in grants to bushfire aid programs.

Economic Fallout

Unfortunately for the economy of Australia, the catastrophic bushfires of 2019-20 were closely followed by the COVID-19 global pandemic. The continent faced unprecedented challenges as governmental agencies and the Reserve Bank of Australia (RBA) worked to mitigate the economic fallout.

At first, the prognosis wasn't all too dire. During a 4 February 2020 annual address to the National Press Club, RBA Governor Philip Lowe took an optimistic stance toward economic recovery from the fire season:

"Our (RBA) assessment is that GDP growth for 2020 as a whole will be largely unaffected. While it is still difficult to be precise, we estimate that the effects of the bush fires will reduce GDP growth by around 0.2 percentage points across two quarters."

Lowe's positive tone proved to be accurate regarding December's GDP figures. According to an Australian Bureau of Statistics (ABS) brief dated 4 March 2020, GDP for the December quarter 2019 grew by 2.2% year-over-year. Subsequently, the ABS stated that the economic impact of the bushfires was observable in isolated areas but not in the aggregate. However, further degradation of national GDP was expected for Q1 2020.

RBA Rate Cuts And Bushfires Sink The Aussie

During the height of the 2019-20 fire season (September to January), the Australian dollar (AUD, Aussie) struggled versus the global majors. Behind a series of RBA rate cuts, the Aussie fell steadily from 2 September 2019 to 31 January 2020. For ease of comparison, the AUD is listed as the base currency in each of these major and cross forex pairings:

• AUD/USD: The AUD fell modestly against the USD, losing 31 pips (-0.4%).
• AUD/EUR: During the period, the Aussie struggled vs the euro. Values of the AUD/EUR fell by 95 pips (-1.5%).
• AUD/GBP: Upon Brexit and political uncertainty residing, the British pound gained ground against many majors. Subsequently, rates of the AUD/GBP fell by 470 pips (-8.4%).
• AUD/CHF: Although the COVID-19 breakout was in its infancy, the Swiss franc gained marketshare. During fire season, the AUD lost -210 pips (-3.2%) against the franc.
• AUD/JPY: The lone bright spot for the AUD was a 118 pip (+1.6%) rally versus the JPY.
• AUD/NZD: A regional forex pair, the NZD outperformed the AUD significantly; rates of the AUD/NZD retraced by 317 pips (-2.9%).
• AUD/CAD: Throughout the bushfires, gold and oil prices remained firm. The result was a modest 99 pip (-1.1%) downturn in the AUD/CAD commodity pair.

Note: Past performance is not an indicator of future results.

Aside from gains against the Japanese yen (JPY), the AUD struggled mightily versus the majors during the 2019-20 fire season. This price action is a bit counterintuitive given the AUD's standing as a commodity currency. For the same period, spot gold prices (XAU/USD) rose by more than US$68.11 per ounce (4.4%). Much to the dismay of AUD investors, the rally in bullion failed to produce forex gains for the Aussie.

Amid the fire season of 2019-20, lagging economic growth and low inflation led to consistently dovish monetary policy decisions from the RBA. Subsequently, the RBA cut interest rates to a record low of 0.75% in late-September 2019. Although not a primary driver of performance, the negative economic impact of the bushfires brought added skepticism to trade of the Aussie.

Summary

The Australian bushfires of 2019-20 were a nearly-unprecedented environmental disaster. The economic fallout from the blazes contributed to slowed industrial growth, RBA rate cuts and a devalued AUD. Ultimately, the extreme fire season played a key role in Australia's pre-COVID-19 slowdown in economic growth