Week Ahead (Jan 13-17): Australia’s Bushfires Could Be Catalyst For RBA Rate Cut

Investors focused on the Australian economy in the week ahead are set to receive updates on new home sales and consumer confidence, as bushfires continue to ravage much of the nation.

The devastating fires, which have been notably severe in areas of New South Wales (NSW) and Victoria, are widely expected to pose adverse impacts on consumer sentiment, spending and the broader pace of economic growth.

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Overall damage from the bushfires could result in an estimated 0.4% hit to the rate of Australia’s gross domestic product growth (GDP) in the first quarter of 2020, after which it may rebound if rebuilding efforts prove successful.

In the near-term, the agriculture, tourism, and retail sectors are most likely to suffer from the devastation, spurring many market participants to anticipate further monetary policy stimulus from the Reserve Bank of Australia (RBA), as well as increased fiscal, as well as climate change, measures from the country’s government.

Australia’s Prime Minister Scott Morrison, who recently announced deployment of A$2bn worth of aid for the calamity, said that the country has undertaken “the single largest federal response to a bushfire disaster” in its history, both in “the scale of the Defence response, the Call-Out of reserves, and the establishment of the recovery agency.”

He added that the government is “responding to an unprecedented crisis with an unprecedented level of support.”

Meanwhile, the International Monetary Fund (IMF) in mid-December said it thinks Australia’s economy will expand by 2.2% in 2020 following growth of about 1.8% in 2019, as it expects private domestic demand to slowly recover, supported by monetary policy easing and personal income tax cuts.

Spending

The bushfires have certainly taken a toll on the country’s inhabitants, as well as generally convinced many tourists that choosing Australia as a travel destination may pose too much danger.

Shane Oliver, AMP Capital’s chief economist and head of investment strategy and economics, noted that the Australian bushfire season, which started in September 2019, has been “horrific with more than 7 million hectares of bush destroyed, more than 25 deaths, significant loss of livestock, estimates of more than a billion wildlife animals killed and more than 1,800 homes destroyed” – while over 200 fires continue to burn.

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The author does not hold any positions in the financial instruments referenced in the materials provided.

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