Economic rumble set to ripple out

Statements have been made this week – considered irresponsible by many economists – that Canterbury's earthquake "will be good for the economy" because of the massive rebuilding required in an otherwise sluggish construction sector.

Five days and 300 aftershocks after the big shake, Lincoln University economist Paul Dalziel gets straight to the point: "The first thing to say is we have lost a substantial amount of wealth. We don't have the same number of houses and business buildings, the same number of assets that we did have as a country a week ago. We have lost some of our physical capital.

"In the short term, we would expect as a country to be able to produce less.

"So, on a national level, there is a negative impact and at a local level an intensely negative impact."

New Zealand Institute of Economic Research (NZIER) principal economist Shamubeel Eaqub says there is "a big spending shock" ahead in the region that makes the second-biggest contribution to New Zealand's economy at around 15 per cent of gross domestic product (GDP).

"Some international evidence suggests up to 30 per cent of small businesses may fail following a natural disaster. We need to ensure this does not happen or minimise the risk. There should be a rebound in retail spending to replace lost material possessions, but will households be more careful about spending, for example on discretionary [items] and other treats, if confidence is at a low ebb?"

It is one of many questions no-one can answer until some solid damage and reconstruction figures emerge from the clean-up. "It's far too early to know" is the current mantra of economists, analysts and industry officials.

Treasury's doubling of its estimate for the final bill for the earthquake from $2 billion to $4b during the week seems to support that. Even then, Treasury's statement was liberally sprinkled with words such as "preliminary", "early" and "ballpark".

It is generally agreed the economic fallout will likely follow the pattern of an earthquake itself: An immediate nasty jolt, with strong activity medium term, then a return to equilibrium.

"In the medium term, because it is highly profitable to own buildings in a central business district and people need houses to live in, the local economy has a clear direction where to invest new capital," Mr Dalziel says.

"In the long term, these new buildings will incorporate new technologies and there will be a new awareness of what a 7.1 earthquake can do to buildings that are not well-designed, and so Christchurch will likely be a better place to live than it was a week ago."

In the absence of hard facts and figures, economists are confident the immediate jolt will be confined to the Canterbury economy, with only minor tremors such as insurance premium rises and maybe a slight rise in the cost of construction materials, or a shortage of them, in store for the rest of us.

Much of the money to repair Canterbury is already in hand – in the Earthquake Commission vaults and in insurance premiums many Cantabrians have faithfully paid for years. The Government will be up for a hefty bill from subsidising Cantabrians' lost wages and local authority restoration spending, but economists say it is likely to cover this by borrowing rather than imposing extra costs on taxpayers through raised taxes or other cost-recovery means.

Treasury advises the earthquake is likely to lower economic growth in the September quarter by about 0.4 per cent, but says this will equalise over time. By June next year the overall net effect to GDP will be positive, about 0.5 per cent, it says, noting that GDP is primarily an indicator of economic activity. It doesn't properly take into account the damage and losses caused by the earthquake.

"More importantly, GDP does not measure the disruption to people's lives and, in this case, the disruption is immense," a Treasury spokesman says.

ANZ National Bank chief economist Cameron Bagrie says while everyone is focusing on the huge amount of money that will flow into Canterbury for restoration and rebuilding in the next two years, the next three months are going to be "very tough" for its economy.

Like NZIER's Mr Eaqub, Mr Bagrie believes locals will be "very conservative" in their spending after a huge knock to their confidence. "Small and medium businesses are under pressure, despite the promise of support from government and banks, and I think there will be a wave of business failures."

Twenty per cent of New Zealand's farmland is in Canterbury, devoted to dairying, sheep farming and grain cropping. While early reports suggest 400 dairy farms were affected and some grain silos damaged, the full extent of damage to irrigation infrastructure and systems is still literally buried.

The good news is that every cow is being milked, Agriculture Minister David Carter says, and while the Lyttelton port sustained an estimated $50 million of damage in an aftershock, exports are still getting out. Fonterra says none of its processing plants in New Zealand's second-biggest dairying region was badly hit. They are operating normally. Coal exports from the West Coast are still reaching Lyttelton.

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