Bushfire blow to economic growth expected and could force RBA cash rate cut

Bushfires have claimed lives, burned over 8 million hectares and could sap economic growth significantly, new analysis finds.

Bushfires have burned over 8 million hectares and could sap economic growth by 0.25 percentage points in each of the December and March quarters, a report forecasts. Picture: AFP

The damage wrought by unprecedented bushfires has ratcheted up the chance of another cut in the official interest rate by the Reserve Bank of Australia as soon as next month according to UBS economist George Tharenou.

The prospect of a fourth official interest rate cut within 12 months came as Shane Oliver, AMP chief economist, doubted the federal government could achieve its budget surplus this year.

UBS Australia chief economist George Tharenou. Picture: Hollie Adams

Bushfires that flared in September, claimed 25 lives so far and burned over 8 million hectares, could sap economic growth by 0.25 percentage points in each of the December and March quarters, according to analysis by UBS economist George Tharenou.

“Overall we think this makes a rate cut from the RBA in February more likely,” he said. “The total economic impact of the bushfire crisis will be very difficult to measure, given much of it will be indirect - lost spending etc,” he added, pointing to a slump in consumer confidence that could weigh on retail sales.

AMP chief economist Shane Oliver put the economic damage over the six-month period at around 0.4 percentage points of GDP in separate analysis that highlighted the long-term economic challenges for the economy from bushfires and efforts to fight climate change.

“Rightly, in the face of the pain caused by the bushfires, the government has relaxed the focus on achieving a budget surplus and it is now questionable as to whether it will be achieved this year and next,” he added. “This is not a major project in the relative scheme of things,” he said. The federal and NSW governments have announced $2bn and $1bn of extra assistance to this year.

“The damage is likely to be much greater than this given assistance under existing disaster programs, extra expenses associated with fighting the fires and the impact of slower growth in the short term on revenue flows,” he added.

According to market pricing, the chance the RBA will cut the official cash rate to 0.5 per cent in February has increased from around 38 per cent to around 60 per cent since Christmas.

The prime minister has started playing down the likelihood of achieving a $5bn budget surplus this financial year, forecast in the December budget update.

In the minutes of the Reserve Bank’s final meeting for 2019 it noted it “had the ability to provide further stimulus in the economy, if required”.