Construction to be foundation of economic rebound: BNZ

Photo / Mark Mitchell

The construction sector is likely to be the foundation of healthy growth in the New Zealand economy over the next two years, with rebuilding after Christchurch's earthquakes only part of the lift.

Bank of New Zealand senior economist Craig Ebert said the distractions of Europe's debt crisis have blinded some to the huge insurance payouts which will lead to extensive Christchurch home and non-residential construction.

The country has also gone through a building slump since the global financial crisis of 2008, and even the effect of recovery from this slowdown would have a significant upward impact on the construction sector, he said.

"The potential to ramp up is quite high," he said. Next to a quite healthy primary sector, "construction could be the most important sector in the next couple of years."

It is estimated that up to $20 billion of insurance payouts are still to be made, and while not all of this will be for reconstructing damaged Christchurch buildings, a fair proportion of it will be, said Ebert.

The number of building consents issued in Christchurch are still comparatively low, but are expected to sharply increase in coming quarters.

Combined with the construction sector coming off a low base, the government's intention to kick on with infrastructure projects, especially roading, and the Canterbury recovery, the BNZ economist team predicts impressive growth.

"We expect residential construction activity in 2012 to be about 25 per cent above last year, with 2013 seeing a 31 per cent gain on top of that," said Ebert. "While these might seem like enormously heroic numbers, they would simply restore things to trend."

Earthquake rebuilding is "adding to a nationwide impetus off its recent extreme lows," he said. "Already, residential building consents are about 20 per cent above their early-2011 lows."

One other earthquake related feature is that other cities' buildings are now being found to not be as shake-tolerant or safe as before Christchurch's events. The upgrading of commercial buildings in particular is expected to also add to a resurgent construction industry.

Ebert said the release of insurance payouts spreads money right across the economy in a flow-on effect.

A construction upturn fuels manufacturing, and also feeds into an increase in consumer spending on items such as home appliances and carpets. Other services such as conveyancing and property development also receive a huge boost.

Ebert said that a jump in building could lead to an increase in construction input costs. While the Reserve Bank is expected to retain a low cash rate, and interest rates in general stay low, the potential impact on inflation is something the central banker will have to closely monitor in the coming year he said.