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Quake rebuilding will outweigh short-term economic costs

Monday 6th September 2010

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The Christchurch earthquake will knock national economic output by between 0.2% and 0.6% in the short term, say Westpac and ASB bank economists respectively.

However, the medium-term impact of reconstruction is likely to more than compensate over the medium term, and may even drive inflation up in the Canterbury region as demand soars for building materials and tradespeople to carry out construction and repair work. 

“The overall GDP impact is likely to be positive,” ASB said in a research note.

“The short-term impact will be negative, but outweighed over time by restoration activity.”

The greatest negative impact would be felt this month, with GDP growth for the three months to September 30 possibly falling as much as 0.6%, equivalent to growth in the rest of the economy, said ASB, in analysis based on the Canterbury economy running at half-pace for four weeks.

Westpac, however, suggests a lesser blow than that, at perhaps 0.2% of GDP, based on modelling for the impact of a major impact in Wellington. Particularly helpful is the fact that critical infrastructure, including electricity, telecommunications, airports and ports are all functioning.

“The local nature of the event and a high level of preparedness for it should keep the implications for financial markets fairly limited,” said Westpac.

ASB also expects a surge of retail spending as households replace damaged items.

“GDP would likely get boosted by roughly 1.5 percentage points over the next 12 months, allowing for $2 billion of reconstruction and further spending on top of that.”

However, both ASB and Westpac note that the national balance sheet is weakened because of the damage, much of which will be paid for either from the Earthquake Commission’s holdings of government bonds or directly by the government, which is expected to meet up to 60% of the cost of repairing uninsurable local government infrastructure – a cost of perhaps $200 million, Westpac estimates.

The international credit rating agency, Standard & Poor’s takes a similar view, saying the earthquake does not affect New Zealand’s AA+/Stable foreign currency and AAA/Stable local currency ratings, with reconstruction offsetting the immediate impact on economic activity.

“There is likely to be a negative impact on government finances, but we believe that the Crown’s very low debt burden … provides it with some room to absorb increased spending on reconstruction,” said S&P sovereign ratings analyst Kyran Curry.

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