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Economic Impacts

Economic activity in Canterbury fell significantly in the immediate aftermath of both earthquakes as people stayed at home and businesses did not open. Business and consumer confidence declined sharply, including the confidence of those outside Canterbury less directly affected, further dampening economic activity. Beyond exports of services, the impact on export activity has been relatively limited.

As businesses have re-opened, people have recommenced work, initial reconstruction activity has gotten underway and economic activity has increased again. The Treasury estimates that nationwide GDP will be around 1.5% lower in 2011 than it would have been otherwise, although it is worth noting there will be difficulties for Statistics New Zealand as it tries to measure economic activity in the earthquake-affected area.

The Treasury is working on the assumption that at least $15 billion is spent repairing, replacing or renewing damaged properties over the next seven years - acknowledging the considerable uncertainty around the extent, cost and timing of rebuilding. It is not expected that rebuilding activity will fully get underway until early 2012, but that it will accelerate quickly thereafter. The rebuild will be assisted by the combination of the settling of insurance claims and a subdued construction sector elsewhere in New Zealand.

A significant amount of the financial costs associated with the damage and rebuild will be covered by private and public (in the form of the Earthquake Commission) insurance, with the majority of the insurance claims subsequently covered by international reinsurers. These reinsurance flows could be in the area of $10 billion - enough to push New Zealand's current account balance temporarily into a rare surplus. The remainder of the costs will be largely borne by the Government, with individuals and private businesses covering the rest.

Figure 2.1 – Indicative timing of Canterbury rebuilding
Figure 2.1 - Indicative timing of Canterbury rebuilding.
Source:  The Treasury

Although the Treasury expects rebuilding to occur in all three sectors simultaneously, it is assumed that the big increase in residential investment activity will take place in calendar 2012, with commercial activity building up steadily, and infrastructure spending this year and next. It is expected construction activity will remain at a high level throughout most of the forecast period, before starting to trend down in 2014.

While some of the construction activity in Canterbury will come at the expense of activity elsewhere, nationwide construction activity is expected to remain above where it would have been otherwise throughout most of the next seven years. The Treasury also forecasts higher private consumption as damaged possessions are replaced and to some extent higher public consumption and transfers owing to earthquake-related expenditure. The extra activity over the medium term is expected to broadly offset the near-term weakness, such that nominal GDP, and hence tax revenue, return to pre-earthquake levels by the end of the forecast period.

It is likely that inflation pressures next year and beyond will be higher than what they would have been otherwise, as the rebuilding activity absorbs currently underutilised labour and capital. The unemployment rate is forecast to fall to 4.8% in March 2013. Construction cost inflation is forecast to increase to around 6% per annum. Lower forecast government consumption growth provides some offset to the extra private consumption and investment activity, providing some reduced pressure on non-tradable inflation. It is likely that recent natural disasters around the world, including the Canterbury earthquakes, will prompt (potentially significant) increases in insurance premiums over time. Finally, as noted above, the Canterbury earthquakes are estimated to have destroyed around 2.5% of the nation's capital stock, reducing the level of potential output and meaning slightly more inflation for any given level of economic activity.

The Reserve Bank of New Zealand will likely be required to have higher interest rates than otherwise over the medium term in order to keep the resulting inflation pressures in check. Higher interest rates imply somewhat greater upward pressure on the New Zealand dollar than would be the case in the absence of the earthquakes, with lower export volume growth as a result. The current account deficit over the forecast period is forecast to be higher because much of the rebuild will involve increased capital imports, although reinsurance inflows have reduced the deficit over recent quarters.

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