Australian Bushfires

More than 10 million hectares have been burnt during the summer bushfire crisis and more than 2000 homes destroyed.  The fires are predicted to cripple already-lagging consumer confidence, devastate Australia’s agriculture and tourism industries, and destroy a significant number of small businesses.

The previous record for bushfire cost was set in 2009’s Black Saturday fires, which resulted in a $4.4b direct loss to the economy. Despite the RBA’s optimistic outlook, there remains a risk of longer-term damage to the broader economy, beyond the direct financial impact to fire ravaged areas. Furthermore, the bushfire season still has months to run, meaning current predicted economic losses are likely low estimates.

The recent flooding along the NSW coast is also hampering recovery efforts, adding another devastating challenge for those trying to rebuild their lives. The economic recovery from the fires is heavily reliant on the money spent on rebuilding efforts. However, we could be waiting some time for that cash injection, as material and labour shortages delay rebuilds, along with bureaucratic bottlenecks, as government agencies expect to be swamped with building applications.

Beyond the impact of these bushfires on the health and wellbeing of the community is yet to be fully understood. The true extent of damage to property is still being measured, and work being undertaken in the vast State forests and national parks may take months to be revealed.

Economic Costs and Market Effects

Immediate Impact on GDP and Wealth

The damage to property and wealth is estimated to run well into the billions considering the current fires have covered an area 15 times bigger than the Black Saturday bushfires. Based on previous modelling of the Tathra fires in 2018, the economic fallout from the latest fires could be as high as $5 billion.

More than 10 million hectares have burned during the bushfire crisis, about half of that in NSW, Australia’s biggest economy. The Insurance Council of Australia estimates claims at $1.34 billion, but this number will rise. Insurers, such as IAG, Suncorp and QBE, will carry liability but exposure to claims will be capped by re-insurance.

Westpac has estimated that the bushfire crisis will cost Australia $5 billion in direct losses and reduce economic growth by 0.2 to 0.5 per cent. Some analysts say it could cost the economy $20 billion in lost output.

Estimates of the direct costs include direct impacts to fire-affected regions such as the loss of tourism and retail income, and the impact on agricultural production. Some of the worst-affected communities may never fully recover, especially in areas that have lost major sources of employment and income.

Eden has lost their paper mill, Mt. Selwyn has lost their whole ski resort, softwood plantations in Tumut, dairy in Bega, and apple orchards in Batlow are gone, making economic recovery in those areas all the more difficult. Despite pledges of financial assistance from government, such industries could take years to recover even if all evacuated residents return. For example, Tumut’s pine plantations are expected to take 20 years to regrow, while the apple orchards could take five years.

In the past, bushfires have tended only to hurt the local economies directly in the path of the flames. However, the risk of there being broader macroeconomic effects this fire season are high, given the scale of the fires, as well as the fact that it’s still early in the bushfire season and the existing fires are yet to be contained.

Broader economic costs of the health effects from smoke pollution are harder to quantify but could also be significant. Air pollution has affected 30% of the population, causing reduced worker productivity. Smoke haze in major capital cities is expected to represent an additional $500 million drag on the economy.

Effect on Consumer Confidence

Weak Retail Spending

An immediate impact of the bushfires is the further dampening of consumer confidence flowing through to weak retail spending. Even before the bushfires, money wasn’t circulating in the economy as it should.

Australians have been hesitant about the economic outlook after the slowdown in growth seen last year and continuing weak wage growth and high underemployment.

The widespread air pollution and devastation have been further deterrents to Australian consumers who had already been shying away from discretionary spending.

Ongoing and Intangible Costs

Estimating the long-term economic impact of a disaster on people’s lives, health and wellbeing, business loss or disruption as well as clean-up, recovery and assistance activities is far more challenging than assessing the direct financial losses. Beyond the known economic costs, it is well recognised that natural disasters have wide-ranging social impacts that are not only high in immediate impact, but often persist for the rest of people’s lives.

Intangible costs include direct and indirect damages that cannot be easily priced such as death and injury, impacts on community connectedness, and impacts on health and wellbeing. More specifically, this also includes the effects of emotional and psychological impacts on the victims of bushfires as well as the opportunity cost of resource expenditure. Opportunity cost refers to the value of the alternative use of the resource that is foregone. For instance, if time is spent in hospital due to injury caused by a natural disaster, the opportunity cost could include lost leisure time or lost wages from not working.

The devastating psychological impact of experiencing such a traumatic event can even affect people’s future earning capacity. The effects of trauma can be far reaching, potentially limiting some people’s ability to return to working in the same role at the same capacity as before their traumatisation. This is without even taking into account whether they’ve lost their usual job or source of income during the bushfire, which can have an exponentially demoralising effect on their ability to find new employment.

Another psychological impact on victims is their willingness to rebuild their homes, particularly if they’ve been through multiple bushfire events in their lifetime.

The cost of intangible impacts may be as high as, or higher than, tangible costs. Importantly, in some cases, social impacts tend to persist over a person’s lifetime while most tangible costs are a one-off. A proportion of people will suffer from chronic disease or mental health problems after a disaster, with negative impacts across their lifetime. These impacts may also be multiple, compounding and not necessarily linear.

Impacts to Industry

Industries such as agriculture are particularly vulnerable to the effects of natural disasters like bushfires. The timing of a disaster also has the potential to exponentially impact the significance of the cost for some agriculturalists. If a fire razes a mature crop, this can represent the loss not only of the crop, but the time, labour and resource costs of growing the crop to maturity.

Activity related to farming, manufacturing, transport, tourism and business generally in the affected areas will be disrupted, which will affect around 2-3% of the population and will be concentrated around the March quarter.

This negative effect to the economy will be partly offset in the short to medium-term, as affected producers will have to undertake spending that they otherwise wouldn’t have had to. However, this expenditure could lead to worse outcomes in the long-term if producers aren’t capable of saddling the cost of returning to production, particularly for those who were already struggling financially due to the effects of the drought.

Wine Industry

Adelaide Hills Vineyard

An ongoing issue caused by this season’s fires is the effect to wine growers’ crops in the Barossa Valley and Adelaide Hills regions. Aside from the vineyards directly devastated by fires in the Adelaide Hills, swathes of mature grapes may have been ruined by smoke-taint from the fires. Because of the nature of this product and the huge time investment involved in getting the product to market, wine growers won’t know the full cost of this season’s bushfires for years in some cases.

About 90% of Henschke’s Lenswood vineyard was unfortunately burnt down in the Cudlee Creek fire, which represents a huge impact for the well-known label. The impact will be felt across the region, as Henschke produces about 25% of the region’s grapes. The losses include most of the vineyard in Lenswood, two sheds full of specialised vineyard equipment, and trellis and irrigation systems totalling about $1.6 million. Some of the vines burnt by the fire were some of the oldest Pinot Noir vines in the region, which is a huge blow to the region’s heritage wine reputation.

Wine Smoke Taint

Smoke taint is a huge concern for growers in the Adelaide Hills and Hunter Valley regions, where some growers have been advised to harvest early or risk their product being ruined. Compounds within smoke from bushfires can have a detrimental effect on grapevines at certain stages in the growing season and can adversely affect grape and wine quality. After the 2009 bushfire season, smoke tainting of Victorian wines resulted in losses of more than $100 million to the wine industry.

Long-term Tourism Impact

The economic impact of these fires has not been limited this time around to people who have lost homes, businesses, or communities. Even businesses who still have a premises from which to operate are under extreme pressure, with their summer trading seasons destroyed by evacuations, road closures and power outages. Visitor numbers are significantly down in popular summer holiday spots as smoke haze and uncertainty about safety continues to keep local and international travellers away.

Australian Bushfires

Vast swathes of coastal NSW and Victoria have lost their most lucrative trading seasons. They have often also been cut off for days, by road, telecommunications and power. Businesses in towns like Braidwood and Bungendore, which have long prospered on the holiday traffic from Canberra to the coast, say their streets are like ghost towns. The economic impact has been particularly severe on Kangaroo Island, where tourists had to be evacuated, farms were devastated and timber plantations burned.

The widespread global media coverage and the smoke pollution in Canberra, Sydney and Melbourne is likely to have a significant long-term effect on Australia’s image as a holiday destination and cut into tourism. Some tour companies have even claimed that patrons are calling up to cancel their holidays six months in advance, for fear of travelling to what they believe to be a disaster zone.

While the Australian Government’s $76 million grant to Tourism Australia may change this, it’s currently the peak window for European’s booking international travel which could have a longer lasting impact on the sector. The impact of the bushfires and the country’s response to climate change will impact Australia’s brand image for years to come.

Hindrance of Construction and Rebuild Efforts

Economic recovery in the aftermath of a disaster in large part relies on the increased spending involved in rebuilding efforts. However, rebuilding could be significantly delayed, since many fires are ongoing, and we’re still only at the start of the usual bushfire season. It could be some months before efforts move from fire containment to rebuilding.

Increased Cost and Lack of Resources

Another hindrance to rebuilding efforts is a potential shortage of resources, as demand for materials will skyrocket at a time when a number of timber plantations have recently been destroyed.

Two years on from the Tathra fires, some residents are still living in caravans, waiting for their properties to be rebuilt. For some, it’s been a lack of available labour, while others have spent a large part of that time just waiting for their building plans to be approved.

Bushfire building requirements are making it more difficult and costly to rebuild. The Bushfire Attack Level (BAL) system was introduced following the 2009 Victorian Bushfire Royal Commission and gives properties in bushfire prone areas a rating from “low” to “flame zone”, determining design and construction requirements.

BAL ratings affect the cost of rebuilding and the cost of insuring a property, with insurer AAMI estimating the additional costs can range from $16,000 to $277,000. For almost all affected people, the insurance payouts they receive for their properties won’t cover the cost of rebuilding to these new standards.

Potential Buyback SchemeFire Danger

Some planners are, somewhat controversially suggesting that rebuilding shouldn’t go ahead in some areas. While the NSW and Victorian governments are promising to help people rebuild their homes, experts have warned against rebuilding in isolated areas. There’s the potential for a buyback scheme, but this has severe limitations, especially in areas where communities need to rebuild in “risky” areas where people rely on income from agricultural production in the region.

On the flip side, some communities could essentially become deserted if people are forced to leave the area due to either the cost of rebuilding, or the associated trauma of rebuilding in a bushfire-prone area. Some individuals likely won’t want to return rebuild their homes and lives at the scene of their traumatisation.

Ongoing Vulnerability to Bushfires

Local pressures and challenges such as drought, declining farm incomes, depopulation, and the inaccessibility of essential services are shown to increase people’s exposure to hazards like bushfires and reduce their capacities to cope and adapt. Vulnerability reduction and sustainable livelihoods in-part rely on facilitating and stimulating regional economic vitality and increasing community resilience to disasters. This requires policies centred around sustainable community planning rather than a bandaid-fix buyback scheme. Pre- and post-disaster policies and funding also need to better reflect the long-term and diverse social impact of disasters, together with a collective approach across government, business, not for profits and community groups to reduce these impacts.

Between 2009–10 and 2012–13, $11.0 billion was spent on disaster recovery, while only $225 million was spent on mitigation (Productivity Commission, 2015). After the 2003 Canberra bushfires, experienced fire managers estimated that a prescribed burn costing about $100,000 could have prevented the disaster. The total direct tangible cost of those fires was $257 million, which doesn’t even touch on the devastating personal trauma and loss of life.

The figures are clear, and the government needs to help communities to prepare for the more severe bushfire seasons we’re beginning to witness. Provisions should include assisting to fortify existing buildings in fire prone areas and assistance for people to rebuild in compliance with new bushfire codes, considering insurance payouts won’t cover the cost of required upgrades. More funding for future bushfire mitigation efforts should be included in recovery spending, and distribution of the assistance packages currently being offered needs to be fast-tracked if affected communities are expected to experience any benefit from them. There have been reports that accessing recovery funds is exceedingly difficult or impossible for those that have lost their livelihoods. Some people are simply being told to apply for Newstart.

If you have a small business that has been affected by the recent bushfires, we urge you to seek advice as soon as possible. As with any significant event that impacts your business, it’s imperative that you get on top of things immediately, whether you’re hoping for a turnaround or to trade out. You can call us on 1300 023 782 or email team@cdrta.com.au for an obligation-free discussion about your options. We can also help to put you in touch with relevant resources or access grants that could assist your recovery. 

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Craig is the principal consultant of C&D Restructure and Taxation Advisory and has been working in the industry since 1999. Having established C&D Commercial Partners in 2015 the precursor to the current business.

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Post Author: Craig Dangar

Craig is the principal consultant of C&D Restructure and Taxation Advisory and has been working in the industry since 1999. Having established C&D Commercial Partners in 2015 the precursor to the current business.

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