Cyclone Gabrielle editorial: Costs will be huge, and won’t be easy to count

Residents wade through floodwaters during Cyclone Gabrielle in the Hawke's Bay town of Clive. Photo / Ian Cooper

Editorial

EDITORIAL

Beware of anyone putting a big round number on the economic costs of Cyclone Gabrielle.

They will almost certainly be wrong.

While the cost is still being counted in human lives most economists have been very wary of leaping into any snap assessments of the economic fallout.

Even if they wanted to, the calculations are far from clear-cut. It is safe to say the costs will rise to the billions - the lost economic output and hit to export earnings, combined with the clean-up and rebuilding costs, will make that inevitable.

Treasury said it expects “to see a very significant cost” to the Crown “in particular asset damage and infrastructure”.

That may mean the Government has to borrow more or (technically speaking) repay debt more slowly.

An adjustment to the Crown’s debt track would effectively deliver extra billions without causing any serious financial market fallout.

One thing we can say about the cyclone event is that, despite all the human tragedy and property damage, it did not cause a ripple on financial markets.

Equity, debt, and currency markets have all carried on bouncing around to the daily soap opera of US economic data.

Almost incredibly, there was no indication that the events will have any material impact on New Zealand’s macroeconomic outlook.

Most economists assessing the prospects for next week’s Offical Cash Rate decision did not adjust their forecasts for a 50 basis point hike.

Some noted the odds of a 75 basis point hike had dwindled and KiwiBank said it thinks the RBNZ should postpone hikes until April (although it doesn’t think it will).

Still, that is in marked contrast to the immediate impact of the Christchurch earthquake where the Reserve Bank was forced to reverse its monetary policy tightening path and slash rates by 50 basis points.

We simply don’t have that luxury right now as we struggle to get on top of inflation.

On balance, the impact of the disaster will likely to be inflationary in the short term as fresh food costs rise on reduced production.

The building sector will also receive a stimulatory boost that will be badly timed for the inflation fight.

Meanwhile, the costs and the negative impact on GDP will be spread over a much longer time frame.

Insurance will pay for a large chunk of the residential rebuilding costs upfront. The big global insurers and their shareholders will take that hit.

Of course, we will all end up paying over time as premiums rise, but those costs won’t feel acute.

Major repairs and upgrades will be required to roading, bridges, and stormwater but in many cases, the flooding has merely highlighted deficiencies that already existed.

If we build back with a view to coping with future weather events, then at least part of the upcoming spending needs to be seen as an investment rather than a cost.

There’s nothing good about the weather events of the past few weeks. But New Zealand’s economy has the reliance to absorb the costs and build back better.