Treasury: Rebuild to cost up to $15b

Christchurch battles strong winds and dust from the silt caused by liquefaction following last week's quake. Photo / Brett Phibbs

The Christchurch earthquake will cost up to $15 billion and knock gross domestic product growth back by 1.5 percentage points, but Treasury predicts a silver lining in 2012 as rebuilding gets underway.

"We estimate that GDP growth will be around 1.5 per cent points lower in the 2011 calendar year solely as a result of the February earthquake," Treasury said in its monthly economic indicators for February.

"From 2012, the recovery will bring a sizeable boost to residential, commercial and infrastructure investment, placing upward pressure on prices depending on the rate of rebuilding."

Treasury said the earthquake had a large cost in human and economic terms and emphasised its estimates were early and tentative.

"The outlook for the New Zealand economy was weaker even before the earthquake as domestic demand was soft despite income gains from high commodity prices.

"The earthquake will have a negative impact on economic activity in 2011, but a positive impact from 2012 as the rebuilding gets underway."

Treasury said domestic developments occurred against an international backdrop of political unrest, high commodity prices and rising inflation.

"Even before the February earthquake, it was apparent that the economy was weaker in the second half of 2010 and early 2011 than we had expected in last year's Half Year Update. Growth in the second half of 2010 was weaker than previously expected and the recovery from the September earthquake was slower than we assumed, reflecting the extent of the damage, ongoing aftershocks and the complexity of the repairs and rebuilding."

That weakness extended in the start of this year as households and businesses were cautious.

"New Zealand's terms of trade stood at their highest level since the early 1970s in the December quarter 2010, but firms (especially farmers) are consolidating and not spending their additional income. Labour demand was weak in the December quarter and private consumption appears to have fallen slightly."

The cost of the quake had to be considered taking those factors into account, Treasury said.

"The earthquake will have a negative impact on activity in the near term through its direct effect on activity, ongoing confidence effects and a further delay in the reconstruction from the September earthquake. However, it will have a positive impact on economic activity once the recovery phase gets into full swing in 2012."

The cost of the February earthquake was likely to be two or three times greater than that of the $5b September quake.

"Allowing for some double counting for cases where prior damage has been compounded, we estimate the combined financial cost of the two earthquakes at around $15b."

- NZPA