Fires will cripple consumer confidence and harm industries such as farming and tourism, Moody’s says

The economic damage from the bushfires devastating Australia’s eastern seaboard is likely to exceed the record $4.4bn set by 2009’s Black Saturday blazes, Moody’s Analytics has said.

The Moody’s economist Katrina Ell said the fires would further cripple Australia’s already anaemic consumer confidence, increasing the chances of a rate cut next month, as well as causing damage to the economy through increased air pollution and direct harm to industries such as farming and tourism.

She said the risk of damage to the broader economy, outside areas ravaged by fire, was increased because the bushfire season still had months to run.

So far the fires have charred at least 8.4m hectares across the whole country, compared with the 450,000 ha affected by Black Saturday.

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The 2009 fires, which ripped through relatively densely populated rural areas north of Melbourne, killed 173 people and almost completely destroyed the town of Marysville.

So far, 25 people are known to have died in this season’s fires, which have also done severe damage to many towns, including Cobargo and Mogo on the NSW south coast, and Mallacoota in the far south-east of Victoria.

Ell said that in the past bushfires had tended only to hurt the local economies directly in the path of the flames.

“But the risk of there being broader macroeconomic spillovers this season are high given the scale of the fires, as well as the fact that it is still early in the bushfire season and the existing fires are yet to be contained,” she said.

She said the direct effect on local industries came on top of the pain of Australia’s lengthy drought.

“Damage to fresh produce will put upward pressure on consumer prices, given that most fresh fruit and vegetables consumed at home are sourced locally,” she said.

She said tourism had also taken a “significant hit” during what is normally peak season.

Tourism bodies say it will cost hundreds of millions of dollars to rebuild.

“Visitor numbers are significantly down in summer hot spots as smoke haze and uncertainty about safety keep local and international travellers away,” she said.

Quick guide Climate change and bushfires Show Hide Does climate change cause bushfires? The link between rising greenhouse gas emissions and increased bushfire risk is complex but, according to major science agencies, clear. Climate change does not create bushfires, but it can and does make them worse. A number of factors contribute to bushfire risk, including temperature, fuel load, dryness, wind speed and humidity. What is the evidence on rising temperatures? The Bureau of Meteorology and the CSIRO say Australia has warmed by 1C since 1910 and temperatures will increase in the future. The Intergovernmental Panel on Climate Change says it is extremely likely increased atmospheric concentrations of greenhouse gases since the mid-20th century is the main reason it is getting hotter. The Bushfire and Natural Hazards research centre says the variability of normal events sits on top of that. Warmer weather increases the number of days each year on which there is high or extreme bushfire risk. What other effects do carbon emissions have? Dry fuel load - the amount of forest and scrub available to burn - has been linked to rising emissions. Under the right conditions, carbon dioxide acts as a kind of fertiliser that increases plant growth. So is climate change making everything dryer? Dryness is more complicated. Complex computer models have not found a consistent climate change signal linked to rising CO2 in the decline in rain that has produced the current eastern Australian drought. But higher temperatures accelerate evaporation. They also extend the growing season for vegetation in many regions, leading to greater transpiration (the process by which water is drawn from the soil and evaporated from plant leaves and flowers). The result is that soils, vegetation and the air may be drier than they would have been with the same amount of rainfall in the past. What do recent weather patterns show? The year coming into the 2019-20 summer has been unusually warm and dry for large parts of Australia. Above average temperatures now occur most years and 2019 has been the fifth driest start to the year on record, and the driest since 1970. Is arson a factor in this year's extreme bushfires? Not a significant one. Two pieces of disinformation, that an “arson emergency”, rather than climate change, is behind the bushfires, and that “greenies” are preventing firefighters from reducing fuel loads in the Australian bush have spread across social media. They have found their way into major news outlets, the mouths of government MPs, and across the globe to Donald Trump Jr and prominent right-wing conspiracy theorists. NSW’s Rural Fire Service has said the major cause of ignition during the crisis has been dry lightning. Victoria police say they do not believe arson had a role in any of the destructive fires this summer. The RFS has also contradicted claims that environmentalists have been holding up hazard reduction work. Photograph: Regi Varghese/AAP

She said broader effects included air pollution, which has affected 30% of the population, and would cause “reduced worker productivity, increased health spending, and lower crop yields”, as well as road closures and the cost to insurers.

As of Monday, more than 8,200 claims worth about $644m had been lodged, according to Insurance Council of Australia data.

The ratings agency S&P said the claims were likely to crimp the profitability of insurers and lead to rises in premiums.

Ell said indirect damage to the economy would be “significant”.

“The devastating social impacts of the fires mean that already-fragile consumer confidence will take an added hit,” she said.

“The Australian consumer was already shying away from discretionary spending and the widespread air pollution and devastation are further deterrents.”

She said the odds of the Reserve Bank cutting official rates from the already record low level of 0.75% to 0.5% when its board meets on 4 February were already high.

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“The fires increase those odds,” she said.

But she said direct spending by governments on the recovery effort would probably be more effective.

“Fiscal measures can target the particular areas concerned, whereas monetary policy has a blunt impact,” she said.

The Morrison government has so far pledged $2bn in fire relief – although the money will flow over two years – and the prime minister, Scott Morrison, and the treasurer, Josh Frydenberg, have weakened their previously rock-solid commitment to returning the budget to surplus.

“This potentially gives the government more flexibility to support the rebuild efforts and the broader economy,” Ell said.

She said rebuilding efforts usually helped offset the damage caused by fires.

“But in this circumstance, rebuilding could be delayed for months, since many fires are ongoing, and this is only the start of the usual bushfire season.

“It could be some months before efforts move from fire containment to rebuilding.”

The economic impact has been particularly severe on Kangaroo Island, off the coast of South Australia, where tourists have been evacuated, farms devastated and timber plantations burned.

On Wednesday, Kangaroo Island Plantation Timber told the stock exchange about 90% of its timber had been affected by the fire, which has burned the western third of the island.