The Canterbury rebuild is hitting its straps and is set to dominate the economy for up to a decade. The rebuild is timely, as the economy could do with a boost. However, it will draw in resources from other parts of the economy. As a result, farmers across the country may notice labour shortages, cost increases, higher interest rates and a strong dollar.
Bigger than Ben Hur
The latest Treasury estimates of rebuild costs jumped from $20 billion to $30 billion. While we think this estimate may prove a tad ambitious, one thing is for sure: the rebuild will dominate the economy for years to come.
For some context, the estimated rebuild is equal to 15 per cent of the Gross Domestic Product. By comparison, Australia's much-hyped mining investment boom amounted to just over 10 per cent. Also relative to the size of the economy, the earthquake damage estimate was bigger than other recent natural disasters such as the Japanese tsunami, the Queensland floods, and Hurricanes Sandy and Katrina combined.
Hitting its straps already
The rebuild has already hit its straps. And it is accelerating.
Residential and commercial building surged 7 per cent and 12 per cent respectively in the September 2012 quarter, driven largely by rebuilding and repairs in Canterbury. With building consents rising 26 per cent in the year to November 2012, there's plenty left to come.
The rebuild is timely as the economy is weak and could do with a boost. As other economies are scrambling for stimulus, the rebuild is set to spur our economic growth from 2.5 per cent, at last count, to above 3 per cent for the next two years.
If this estimate proves correct, we expect to outperform our Australian cousins over the ditch.
The accelerating growth will help create jobs and absorb spare capacity in the economy. As a result, we expect the unemployment rate to fall about 5 per cent by 2014.
Resources from across the country
Some of these workers will be drawn to Canterbury from other parts of the country, creating worker shortages in not only construction, but in the supporting service sectors too.
Other resources such as plant and machinery will also shift to Canterbury.
As a result, farmers may find it hard to get work done, particularly building. Where farmers may not notice shortages, they may notice an increase in price.
Leading to inflation
Inflation will increase as worker and other shortages lead to wage and cost increases.
Initially these cost increases will be isolated to construction and Canterbury, but eventually the increases will spill into other sectors and regions.
Interest rates will rise
Our view is that in order to nip inflation in the bud, interest rates will need to rise from the end of this year. This view is earlier than the Reserve Bank currently anticipates.
The Reserve Bank thinks improving productivity in the construction industry in Canterbury will keep a lid on inflation through 2013. We are not so hopeful.
We also expect the dollar to remain high.
In particular, the earthquake rebuild helps our growth prospects look good compared to other economies, making New Zealand assets, including the dollar, a good bet for international investors.
Rebalancing on hold
Exports will take a back seat over the next few years as the rebuild dominates the economy. Imports of machinery and equipment for the rebuild will also increase.
Together, this will widen our current account deficit through 2014 and rebalancing the economy towards exports will be postponed.