Aviation, tourism and energy writer for the Business Herald

North Canterbury earthquake could dent economic confidence says ASB

ASB economists say this morning's earthquake could increase the odds of another interest rate cut next year if economic disruption leads to a fall in confidence.

They also warn there is a risk to the booming tourism sector and rebuilding will put pressure on the stretched constructiion sector.

Based on damage reports, they say South Island transport infrastructure and Wellington's business district are the key areas that are vulnerable to short-term economic disruption.

The 2013 Seddon earthquakes caused moderate damage to a number of Wellington buildings.

However, the initial business disruption was offset by increased demand for repair and replacement of damaged goods.

WATCH: Earthquake damage in Wellington

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With larger events, such as the 2011 Canterbury quake, the negative economic impact was a result of subsequent population outflows and the impacts on spending and broader economic demand in the region.

Repairing damage from today's earthquakes will boost construction demand over the coming year, at a time when construction capacity is already stretched.

"We expect this will result in even stronger construction inflation. Earthquake repair demand will be broad-based across infrastructure, commercial buildings (in particular Wellington) and residential housing.''

As there may be limited capacity for further increase in construction activity, the urgency of repair work may crowd out or defer activity which would have otherwise taken place.

"In the short term, if there is a prolonged period of aftershocks, there may be a temporary fall in construction activity."

There is some risk that large earthquakes could deter or defer overseas visitor arrivals.

Tourism activity is likely to be diverted away from the mid-upper South Island as a result of the most recent quakes.

Canterbury suffered a large decline in guest nights due to the destruction of accommodation capacity in 2011.

"Given damage appears to be more limited, any impacts on tourism should be comparatively short lived," the ASB economists say.

The New Zealand dollar fell in response to the earthquakes this morning, but the extent of decline appears fairly limited.

Damage to the ground outside Westpac Stadium on the Wellington seafront following a 7.5 M earthquake that struck north-Canterbury  picture / Craig Doolan
Damage to the ground outside Westpac Stadium on the Wellington seafront following a 7.5 M earthquake that struck north-Canterbury picture / Craig Doolan

The timing of the earthquakes allowed for more information to be available before the markets reacted. This morning the New Zealand dollar was 1.5 per cent to 2 per cent lower against most currencies and down just 0.5 per cent against the Australian dollar.

While today's earthquake was severe, the location suggests a limited economic impact, says the ASB.

In comparison, the February 2011 Canterbury earthquake caused catastrophic damage to New Zealand's second biggest city and economic confidence was at risk.

Damage to the ground outside Westpac Stadium on the Wellington seafront following a 7.5 M earthquake that struck north-Canterbury  picture / Craig Doolan
Damage to the ground outside Westpac Stadium on the Wellington seafront following a 7.5 M earthquake that struck north-Canterbury picture / Craig Doolan

In response, the Reserve Bank delivered a 50 basis point rate cut in March 2011 returning the Official Cash Rate to "emergency settings".

This had followed two 25 basis point hikes in mid-2010. The OCR remained at 2.5 per cent until March 2014.

The RBNZ's next scheduled OCR review is now on February 9 next year.

- NZ Herald

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