The Economic Impact of the Fires, Floods, and the Flu

The Economic Impact of the Fires, Floods, and the Flu

Hear that?

Neither do I…

That’s the sound of silence as I marched my kids back to school this morning.

While not everyone longs for the start of the Aussie school year like I do, the last week in January is an important marker of the year.

The final days of January fall after Australia Day. And it signals that the business year is about to hit full speed once again.

The problem, however, is between Christmas and now, the mainstream press don’t really have much to chew on.

Meaning we’ve basically had uninterrupted coverage of the bushfires…

…which then turned into uninterrupted coverage of the hail storms…

…and the flooding that came with the wild storms.

Then out of nowhere, a nasty virus infected a few thousand people and we’ve been stuck on that for a week.

This morning alone in one market update report, I counted six articles analysing the impact the virus will have on the economy.

In the last three weeks, the mainstream has really focused on fires, floods, and the latest flu virus.

The coverage has been so intense, that even my nine-year-old commented on what a bad start to 2020 it’s been.

The thing is, it’s like this every year.

There’s little fresh news and pages that need ink.

More to the point, are these big problems or are they hiding something else?

Counting the economic cost

Look, there’s no denying it. The bushfires this year have been particularly devastating.

And while photos of koalas and the scorched earth make pages pretty, the true impact of the fires is yet to be felt.

In fact, as I said at the start of the year, the economic impact of destructive weather events is going to become more prominent.

But it’s important we understand the indirect costs more so than the direct ones.

The obvious direct costs are high insurance premiums and a small hit to gross domestic product (GDP).

The reality is, the areas the fires ripped through only contribute a small amount to our total GDP.

Nonetheless, there will be a much bigger cost for property and business owners in those spots.

Some people might be uninsured and can’t afford to rebuild at all. Some people might have insurance that only covers a portion of rebuilding. Some people have lost wages or will continue to lose wages because their source of employment is closed.

That’s before the agricultural impact is understood.

Soil erosion is a huge problem after fires.

Not only does the dry top soil tend to shift with the winds, the remaining earth is without nutrients. Meaning growing what we eat will be difficult until (or even if) the soil is rehabilitated.

Farmers need to refence and build sheds. But there’s no point doing any of that until the ground is habitable for livestock once more…

Of course, us pen pushers in the city don’t see this.

We’ll feel it through higher food prices at our local supermarket.

The point is, what was dominating headlines only two weeks ago will be affecting us long after the papers have moved onto something else.

Keep calm and ignore the headlines

That brings us to China and all the bad news happening there.

With the fires out of the way, the economic doom and gloom has moved onto the panic around this latest virus – a novel coronavirus.

The mainstream is gobbling up every detail, and perhaps making investors more alarmed then they need to be.

A financial wealth manager contact of mine, sent an email to his clients yesterday warning them of this.

He was quick to point out to investors the problem and not to overreact…but also then to make sure investors remember their objectives.

Simply put, he said that short-term investors should be wary of the market volatility. Longer term investors need to remember the big picture driving their investment decisions.

And the thing is, the big picture backdrop in China is more precarious than this latest bug…

China – An Economy in decline?

Of course, let’s not dismiss the full impact of the coronavirus just yet.

However, before the press start throwing out the billions of dollars lost to the Chinese economy, know this: the Chinese economy.

was slowing anyway

Now, normally I don’t have to use that word ‘slowing’ when describing Chinese economic growth. The Middle Kingdom’s GDP was 6.1% for 2019…almost triple Australia’s.

While some commentators have been quick to point out that the recent GDP data is the slowest in almost 30 years…they haven’t then pointed out the economic transformation that has gone with it.

Making the comparison is useless.

Three decades ago China was a very different economy.

They’ve gone from exporting their labour to mimicking a Western economy without democracy.

More to the point, only focusing on GDP ignores the shift taking place in China.

Towards the end of last year, Chinese provinces were being forced to revise their gross domestic product data for 2018.

Officials in Beijing are keen to ‘unify’ GDP reporting statistics.

Turns out, some local officials would bump up the numbers in order to get a promotion…1

Many people have long suspected Chinese data was fake. And Beijing officials are set to mask over the paper trail while they can.

Inside those GDP numbers, shows an economy with falling local car sales and companies struggling to pay their bills. Businesses falling behind on paying their staff and their clients reached an all-time new high last year.

To boot, corporate Chinese debt is not only climbing, but so are defaults.

Local firms — both private and state-owned — reached the highest number of corporate defaults ever for 2019. Some US$20 billion corporate bonds were defaulted on by December last year.2

Plus the first ever Chinese state-backed business — Tewoo Group, a major Chinese commodities trading firm — missed its first payment in two decades to foreign investors.3

But none of the above makes for a good headline.

The thing is, all of the above is just the tip of the economic problems in China. And that decline could be just getting started.

To paraphrase my rogue wealth management contact, don’t let the short-term focus of the headlines ruin your long-term investment plans.

Until next time,

Shae Russell Signature

Shae Russell,
Editor, The Daily Reckoning Australia

PS: Learn why a recession in Australia is coming and three steps to ‘recession-proof’ your wealth. Click here to download your free report.