Cyclone Gabrielle: Liam Dann - storm deals a blow to our fragile economic recovery but we have an opportunity

OPINION:

Cyclone Gabrielle and the Auckland floods have dealt a terrible blow to the nation.

There is no sugarcoating the events of the past few weeks. The loss of lives, homes and livelihoods has turned the world on its head for thousands of Kiwis.

There’ll be few of us who don’t know someone affected directly but no one will be untouched by the events.

The costs of the cyclone are sadly going to change the economic path of the nation.

The timing is cruel.

The post-pandemic economic recovery was in the balance even before these events.

Now it looks harder, more complex and the outcome more difficult to forecast.

Economists have only just begun to count the cost of the cyclone and have been rightly wary of making specific estimates.

The full scale of the disaster is still becoming apparent.

It probably suffices to say this is going to cost multiple billions. It looks increasingly like it will require the Government to make some big fiscal decisions about spending and borrowing.

The final bill may never be known.

The early estimates for the rebuild costs after the Christchurch earthquake were around $10 billion.

By 2013 that had risen to $40b. After that, we kind of stopped counting.

Conversely, initial back-of-the-envelope calculations for the economic impact of pandemic lockdowns and border closures were far too negative.

Every disaster is different and, even if they have similarities, the state the economy is in when they hit makes a big difference to their final impact.

The Christchurch earthquake rebuild provided economic stimulus at a time when we were still living in the shadow of the Global Financial Crisis.

The construction sector was in the doldrums and inflation was near record lows. The economy had enough spare capacity to respond.

That’s not the case now. Inflation is still running hot and, unfortunately, another shock to supply chains, especially fresh fruit and vegetables, will only make it worse.

The building and construction sector was just starting to show signs of cooling off, on the back of falling house prices.

It will now be back at full capacity, keeping costs elevated for longer.

How serious this added inflation risk is to the economy has already divided economists looking out to next week’s Reserve Bank monetary policy statement.

Given the financial pain many parts of the country will be feeling right now, KiwiBank has argued that the RBNZ should put interest rate hikes on hold - at least until April.

KiwiBank’s analysis is underpinned by evidence that global inflation is starting to ease.

But most others say inflationary risks still outweigh the negative effect the flooding has on our economic growth.

The Reserve Bank is still expected to hike the official cash rate by 50 basis points. The market sees some chance it may opt for a smaller 25 basis point hike.

The 75 basis point hike many expected just a few weeks ago is now off the table.

Issues like who pays, over what time frames and how we choose to rebuild all make assessing costs a very complex business.

Insurers will pay for a large chunk of the residential rebuilding costs upfront. The big global re-insurance firms and their shareholders will take that hit.

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

There will be a more immediate hit to GDP output as exports are disrupted.

This was terrible timing for the horticulture industry with trees and vines, full of ripening fruit, completely destroyed.

There also are lost earnings for businesses, retailers and contractors who have simply had to shut down and wait out the carnage - another painful revenue blow after three years of pandemic disruptions.

And then there is the enormous bill facing taxpayers as we repair and upgrade infrastructure - roading, bridges, stormwater and power.

On Friday, Grant Robertson alluded to a $1b roading bill from flooding in late January. The cyclone’s toll will be more than that.

Minister of Finance Grant Robertson. Photo / Mark Mitchell

Thankfully the power of the crown balance sheet will allow that cost to be spread across a much longer time frame.

BNZ economist Stephen Toplis has made the point that Government has the capacity to find $20b for rebuilding (although he doesn’t think that much will be needed) simply by shifting the projected peak for our debt track from 21.4 per cent (of GDP) to 27 per cent.

Thanks to the careful fiscal management of governments, for the past 30 years or so, we are in the fortunate position of being able to do that without major fallout from financial markets.

Economic costs on this scale transcend daily political battles, they require a different kind of fiscal thinking.

And the only optimistic way to look at the rebuild is to recognise the opportunity for improving and upgrading our infrastructure.

In many cases, we know there was work that was already overdue and the flooding has highlighted deficiencies that already existed.

If we are aspirational about the rebuild then we can look to boost future economic performance and mitigate the ongoing impact of climate change that we know is coming our way.

That means we can at least look at some of the spending as an investment rather than a cost.

For now though, the economic fallout has no real upside.

All we can do is look after the people who need help the most ... and be patient and thankful to live in an economy that is robust and resilient.