07/02/2020

RBA Governor Warns Of 'Profound' Impact From Climate Change, Urges Investment

Sydney Morning Herald - Shane Wright | Matt Wade

Reserve Bank governor Philip Lowe has warned climate change will have a "profound" impact on the economy and leave businesses with stranded assets while urging governments to borrow more to boost productivity and protect it from a warming environment.
As economists warned the country faced its first quarter of negative growth in nine years due to the combined impact of the coronavirus and the summer's bushfires, Dr Lowe used his first public address of the year to urge more investment to deliver "strong and consistent growth" rather than relying on the nation's fundamentals to get by.
RBA governor Philip Lowe says business and government should borrow more to invest in productivity-enhancing projects including ways to deal with climate change. Credit: AFR
The bank kept official interest rates at an equal record low of 0.75 per cent at its February board meeting on Tuesday, tipping the economy to grow 2.75 per cent this year despite the impact of the bushfires and the outbreak of coronavirus.
Dr Lowe said the bank believed the fires would likely cut GDP across the December and March quarters by 0.2 percentage points while the drought would hurt growth by 0.25 per cent through the year. It was too early to determine the full impact of the coronavirus.
The Federal Chamber of Automotive Industries reported on Tuesday there were 71,731 new cars bought through January, the worst opening to a year since 2003. The chamber noted bushfires and international issues such as the coronavirus were likely reasons for the poor performance.
In an address to the National Press Club, Dr Lowe said low interest rates meant there was no excuse for business and governments not to borrow and invest in projects such as infrastructure, technology upgrades, education and training or energy systems.
He said governments and businesses should also invest in dealing with climate change, arguing it was already having a financial impact that would only grow.
"I think that we're seeing climate change affect patterns of production and distribution and investment. We're seeing the cost and availability of insurance change, which is going to affect where people invest," he said.
"The fact that it is affecting the value of assets and can likely do that in the future means that there are financial stability implications over time. We're likely to see at some point some stranded assets and the value falls."
The Morrison government is aiming to deliver the nation's first federal budget surplus since before the global financial crisis.
But Dr Lowe said there are more pressing budget policy challenges, including the way for fiscal and monetary policy to stabilise the economy given low interest rate settings.
"Whether or not the government has a small budget surplus from an economic perspective is not really that important," he said.
Interest rates and the budget may be called in to help the economy with growing concerns about the impact of coronavirus.
ANZ's economics team had initially expected the virus to lower growth by 0.2 percentage points in the March quarter, but now say it appeared the virus and the response to it across the world would likely take half a percentage point off growth through the first three months of this year.
Several market economists are now tipping the coronavirus may see Australia post its first quarter of negative growth in nine years. Credit: Getty
Economists Felicity Emmett and David Plank said the tourism and education sectors would be hit hardest but there would be a broader impact across the country.
"Local consumer sentiment took a hit from the bushfires and the news regarding the virus is keeping confidence levels low," they said.
"Rising uncertainty about the impact of the virus is likely to test business confidence, and there is the potential for investment plans to be delayed."
They were backed by AMP Capital chief economist Shane Oliver who said GDP could be 0.2 percentage points lower this quarter, but growth would rebound in the June quarter.
The last time the Australian economy contracted in a quarter was in early 2011 when cyclones closed key ports across Queensland and Western Australia. The economy quickly rebound in the June quarter.

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