Monday 10 February 2020

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Focus sustainable development - Australia : the economic miracle caught up by the climate crisis

The Australian economy has long seemed protected from the global economic and financial crises of the past decades. Australia has indeed thrived on the development of its mining industry (iron, coal, gold), which has prompted a number of criticisms for its role in climate change. This text looks into the exceptional climatic events that occurred this year in Australia, as well as their consequences for the economy of the country. 

The Australian economy has long seemed protected from the global economic and financial crises of the past decades (Asian crisis of the late 1990s, Great Recession of 2008/2009, crisis in the euro area). In fact, the last recession that the country experienced occurred in 1991 ... almost thirty years ago! The rapid economic development of China and the colossal needs of this country in raw materials constituted an obvious outlet for the raw materials extracted in Australia (iron, coal, gold): over the last quarters, China represented around 40% of the Australian exports (compared to less than 10% in the early 2000s). The development of the mining industry initially propelled Australian growth thanks to massive investments made in the sector then thanks to exports. In 2017, Australia was the third largest coal producer in the world and the largest net exporter (narrowly ahead of Indonesia). 

As a corollary of this economic strength, the Australian central bank (RBA) has long been, with the New Zealand central bank, the central bank of developed countries with the highest policy rates: the rate of RBA was 7.25% in 2008. The sharp drop in key interest rates that followed the Great Recession of 2008/2009 led to a very sharp acceleration in property prices (+ 8% per year on average over the period 2013-2017) and generated a sharp increase in household debt (from 110% of disposable income in 2008 to 142% in 2019). With the exception of Switzerland, Australia is the developed country with the highest household debt when taken as % of GDP. The combination of this high household debt and the downturn in the real estate market (prices have been falling since the end of 2017) has implied a very marked slowdown in economic growth. The Australian economy is therefore now facing major domestic challenges (household debt and very high property prices) as well as international challenges (slowdown in China). And as we will see, global warming is now an additional threat.



Beyond the dramatic fires, 2019 turns out to have been an exceptional year since other extreme climatic phenomena took place throughout the year. First, temperatures throughout the year exceeded on average 2.1 ° C over the years 1961-1990. At the start of 2019, the Victoria state for instance experienced historical temperature records (47.6 ° C on January 25, 2019).

Between February and April 2019, floods hit certain regions (notably Queensland, in the northeast of the country), causing significant losses of livestock. These heavy rains did not prevent the year 2019 from being the year when the drought was the strongest of the period 1900-2019 with only 277.6 millimeters of rainfall on average on the country, that is to say 40% less than the long-term average. We have to go back to 1902 to find an almost similar drought.  MétéoFrance explains these extreme phenomena by the fact that in 2019 Australia experienced strong atmospheric circulation anomalies in addition to the context of global warming. Two phenomena explain more particularly that the climate was warmer and drier this year: The “Indian Ocean Dipole” in a strongly positive phase during the second half of 2019 (warmer than normal waters on the west side of the Indian Ocean, and colder waters to the east on the Indonesia side, favoring downward atmospheric movements and chronic drought towards Australia) and the “Antarctic Oscillation” in negative phase (lower pressure in the south of Oceania than in Antarctica, involving a supply of hot and dry air in the Australian desert).



The financial cost of destruction is relatively limited since the bushfires affected sparsely populated areas. But the bushfires will have a direct impact on GDP growth in the 4th quarter of 2019 and at the start of 2020, which will be felt on tourism, which is one of the main resources of the country (just over 3% of GDP and around 5% of employment), on agricultural production and on private investment. According to the credit rating agency Moody's, the economic impact of the bushfires should be limited since it would be less than 0.1% of GDP in 2020 and 2021. The agency believes that "more frequent and more severe natural disasters are likely to result in increasing and recurring costs, testing the ability of the federal and state governments to pay debts”. On the other hand, the cost of the water and electricity supply cuts for numerous households and businesses, road closures and mass evacuations is difficult to assess. The same is true for the air pollution generated from the bushfires, which also has a significant impact on activity. In addition, as Australia experienced several extreme weather events during 2019 and it is therefore likely that the "total climate cost" for the Australian economy will be much higher. In a speech in March 2019, RBA deputy governor Guy Debelle already estimated that drought should cost 0.15% growth to the economy Australian market in 2019. Finally, focusing only on the direct impact on GDP growth (which constitutes a flow) of natural disasters is obviously very simplistic since they mainly affect the wealth of a country, whether it is the environment, the biodiversity, real estate or means of production. The high human, environmental and economic impacts as well as the country's vulnerability to climate change make it difficult to understand the current government's small ambition on the subject. And Australia is starting to be singled out internationally. In November 2019, the Riksbank announced1 that it would no longer invest its foreign exchange reserves in bonds of issuers with a high carbon footprint. It therefore proceeded to sell securities issued by the states of Queensland and Western Australia (as well as securities from some Canadian provinces).


Australia has long held the sad record for per capita CO2 emissions. Even if efforts have been made since 2008, Australia produces 15.4 tonnes per capita (2014 data) which makes it the 2nd most polluting country on the planet behind the United States (16.5 tonnes) or almost double the OECD average (9.5 tonnes). The country's energy mix offers an important place for coal (30%) and oil (39%). The share of coal reaches almost 60% in the electricity production and fossil fuels 80%. 

Although Australia has very large uranium resources (33% of the world's resources), the country has banned the development of nuclear power plants to generate electricity. Over the past decade, the nuclear debate started again with the need to lower the country's CO2 emissions, reduce electricity prices and manage the aging of coal-fired power plants. Investigations into the exploitation of nuclear energy and the lifting of the ban on the exploitation of Uranium started in mid-2019 under the impulse of the Prime Minister, Scott Morrison, favorable to the repeal of the nuclear ban. The share of renewable energy is still relatively low in Australia and especially if we consider solar energy relative to the country's capacity. 

Despite an unprecedented scale and a terrible human and environmental toll, this fire season should not have a major impact on the country's growth. Nevertheless, it is likely that the economic impact of climate change is set to increase with the frequency of extreme climate events. In the short term, it would seem that the major impact is more of a political order and the government is criticized for its timid action on the climate and could push for a change in its policy in energy field. According to the Lowy polling institute, 64% of adult Australians see climate change as a "major threat", up 6 points from 2018 and 18 points from 2014.

Find below the full document..

Juliette Cohen,

Strategist at CPR-AM 

Bastien Drut,

Senior Strategist at CPR-AM


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