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Australian Economy Struck by Wildfires, Setting Up Stimulus

Michael Heath

(Bloomberg) -- Australia’s economy is likely to be further weighed down by wildfires that have scorched an area larger than the Republic of Ireland and could intensify in coming months with more hot, dry weather predicted.

Goldman Sachs Group Inc. sees immediate economic hits to private investment and farm production, with a drag on tourism deepening over coming months. This will be partly offset by a lift in fiscal spending -- including military deployment -- translating to a positive contribution from government consumption to GDP.

“The unprecedented physical scale of the current bushfires could amplify the headwinds to farm production or international tourism exports, while the unprecedented smoke haze around major population centers could weigh on spending in communities not directly affected by the fires,” said Andrew Boak, Goldman Sachs chief economist for Australia.

With more than 120 fires still burning in New South Wales alone and weeks to run in the southern hemisphere’s summer, the death toll -- currently at least 25 people -- and devastation could mount. Temperatures are forecast to reach dangerous levels in some areas of southeast Australia over the next two days, and on Thursday a community in South Australia state was being evacuated.

Since Jan. 2, areas of Victoria have been under a state of disaster that will extend into at least Saturday. “Hot, dry, windy, dangerous, dynamic conditions” are expected, according to the state’s minister for police and emergency services, Lisa Neville.

Images of burnt koalas, major cities clogged with acrid smoke and tourists herded onto beaches as a last redoubt against firestorms have been beamed around the world, threatening lasting damage to Australia’s reputation. This could see a longer-term fallout beyond the 0.2-0.4 percentage points expected to be shaved from GDP growth in the near-term.

RBA Bets

Traders are pricing in around a 50-50 chance the central bank will lower interest rates by a quarter point at its Feb. 4 meeting and government bond yields on Wednesday fell to 3 1/2-week lows before recovering somewhat early today. The Australian dollar fell on each of the first five trading days of the New Year to be the weakest developed-nation currency over the period. It similarly recovered early Thursday to trade at 68.65 U.S. cents at 10:02 a.m. in Sydney.

While some of the recent angst in markets reflects a flight to safety following the escalation of tensions between the U.S. and Iran, the Aussie dollar’s under performance relative to other currencies suggests there’s also been a drag from the bush fire impact on Australia’s fragile consumer.

Commonwealth Bank of Australia, the nation’s largest lender, says business disruption will see regional economies and tourism particularly hurt. CBA says its PMI already shows “some bush fire impact and leading indicators like accommodation searches are already dropping away.” The bank estimates tourism accounts for 3.1% of gross domestic product and 5.2% of employment.

The government has already announced compensation for volunteer firefighters, deployment of military assets, including the call up of reservists, and a A$2 billion ($1.4 billion) bush fire recovery fund.

New South Wales, the most populous state that’s been hardest hit by the crisis, on Thursday pledged a further A$1 billion focused on repairing infrastructure. The government spending should help offset some of the pull back in private activity.

The blazes nationwide have destroyed more than 25 million acres of forest and bush, razed about 2,000 homes and caused the deaths of an estimated 1 billion native animals.

Shane Oliver, chief economist at AMP Capital Investors Ltd. in Sydney, says the economic hit comes at a time when growth is already weak. “It risks knocking March quarter growth to near zero or below,” he said, adding that while the risk of recession has increased, the country’s 28-year run without two consecutive quarters of contraction is unlikely to end this time.

(Updates with Victoria conditions in 5th paragraph)

To contact the reporter on this story: Michael Heath in Sydney at mheath1@bloomberg.net

To contact the editors responsible for this story: Nasreen Seria at nseria@bloomberg.net, Edward Johnson

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