Christchurch earthquake will see long-term GDP rise

By Brian Fallow

The earthquake in Christchurch will mean more work for the building sector, which has plenty of spare capacity. Photo / Greg Bowker
The earthquake in Christchurch will mean more work for the building sector, which has plenty of spare capacity. Photo / Greg Bowker

The economic impact of the Canterbury earthquake will be sharply negative in the near term but probably positive for gross domestic product over a longer period, economists say.

Canterbury is home to 13 per cent of the population and contributes 15 per cent of national GDP.

The immediate impact is loss of activity in businesses which are closed or whose operations will be disrupted.

ASB chief economist Nick Tuffley said a rough rule of thumb is that every week Canterbury operated at half its normal capacity would shave roughly 0.14 percentage points of GDP.

"Four weeks running at an average of half capacity would impact GDP by 0.6 percentage points, largely offsetting growth elsewhere in the economy."

Over a longer period, the impact on GDP is likely to be positive, on the grounds that $2 billion, say, of damage represents close to $2 billion of additional demand, in rebuilding, repairing and replacing what was damaged.

Bank of New Zealand head of research Stephen Toplis said that as it turned out, if such a disaster had to happen it could not have happened at a better time.

"The building sector should have significant spare capacity as activity levels have been clobbered by the current economic malaise," he said.

"If it had happened a few years back the industry would have had no capacity to respond and the ability for suppliers to significantly hike prices would have been great."

On the supply side, damage to productive capacity is still being assessed. Agriculture Minister David Carter has warned that while some damage to milking sheds is immediately apparent, it may take a while for any damage to the infrastructure supporting irrigation to be identified.

As for damage to factories, UBS New Zealand economist Robin Clements, who lives in Christchurch, does not expect it to be extensive, based on which parts of the city have borne the brunt.

Likewise, while some international visitors might be put off by news of the disaster, Clements expects that effect to be fairly short-term.

But Tuffley said that if specialised equipment was damaged it would take time to replace it, especially if it had to be imported.

NZIER principal economist Shamubeel Eaqub pointed to the risk that if supplies to customers were disrupted they could take their business elsewhere - just as some New Zealand seafood exporters had benefited from the air freight disruptions when Iceland's volcano blew.

ANZ chief economist Cameron Bagrie highlighted the hit to confidence, which had already been slipping for five months, albeit from respectable levels, and the need for policymakers to demonstrate leadership and willingness to act - or, in the case of the Reserve Bank, not to act. The markets now regard it as near certain it will leave the official cash rate where it is on September 16.

Those with experience of other natural disasters know that the process of clean-up and repair is stressful, depressing and feels as if it takes forever. This is not positive for consumer sentiment.

Clements said people would not be rushing out to spend while they were worrying about how much their repair bill was going to be and when their insurance claims would be settled.

"But I wouldn't overplay that. It is not as if there had been widespread death and injury."

Prime Minister John Key said the Government had spoken to banks and Inland Revenue to stress the need for some forbearance for businesses, whose cash flow would be disrupted.

Eaqub said some of the jobs lost by a higher-than-usual rate of business failure would be in sectors other than those which would be boosted by the rebuilding effort. The demand which had been met by those enterprises would not necessarily seamlessly or swiftly flow on to others.

Economists said that while GDP would show the impact of the disruption and rebuilding on expenditure and production, it would not pick up the significant loss of wealth caused by the earthquake.

"This bill will be borne largely by the Earthquake Commission and private insurers for private damage, and by central and local government for public infrastructure," Tuffley said.

The cost of damage to uninsured assets, like roads and water infrastructure, probably ran into hundreds of millions of dollars. Historically, the lion's share of the cost of repairing or replacing those assets after a natural disaster - Cyclone Bola, for example - was met by the Crown.

- Brian Fallow

STATISTICS REPORTS DELAYED

Statistics New Zealand is delaying the release of a number of its statistical reports this week because two of its offices in Christchurch remain closed in the wake of Saturday's powerful earthquake.

But at this stage it hopes to release the Gross Domestic Product and Balance of Payments reports later this month as expected.

The Economic Survey of Manufacturing for the June quarter and value of building work in place for June are deferred until further notice.

They were due to be released tomorrow.

Electronic card transactions data for August is also deferred from its release date of Thursday. The Accommodation Survey for July, due on Friday, is deferred until further notice.

The Wholesale Trade Survey for the June quarter will be released as scheduled today and the Overseas Trade Index (volumes) and Overseas Trade Index (prices) will both be released as scheduled on Friday.

- NZPA

- NZ Herald

© Copyright 2014, APN New Zealand Limited

Assembled by: (static) on red akl_a4 at 02 Oct 2014 10:07:14 Processing Time: 605ms