Domestic Outlook (continued)
...with the Canterbury rebuild set to boost residential investment...
- Figure 1.7 - Real residential investment
- Sources: Statistics New Zealand, the Treasury
The Canterbury rebuild remains a strong driver of demand growth in the Half Year Update forecasts, with earthquake-related residential rebuilding a key factor underpinning the near-term pick-up in residential investment in the Half Year Update. Once in full swing, the residential rebuild comprises over 15% of total real residential investment. Growth in residential investment accelerated sharply in the June quarter of 2012 and is forecast to rise further to an annual peak of over 34% in the final quarter of 2013.
Residential investment activity in the rest of the country is expected to increase over time as pent-up demand in some regions comes through. Demand for housing is likely to be supported by past population growth, expected future population increases, rising household incomes, a forecast gradual decline in unemployment, low interest rates, and some ongoing repairs of leaky homes. The level of residential investment activity in our forecasts peaks in the March 2016 year almost 50% higher than its average over the 2000s. The level of residential investment starts to normalise at the end of the period as the bulk of the Canterbury residential rebuild is completed.
- Figure 1.8 - Real business investment
- Sources: Statistics New Zealand, the Treasury
...as well as business investment
Canterbury-related rebuild activity is also a strong driver of the expected pick-up in business investment over the forecast period. The Treasury's estimate for the damage to commercial and infrastructure assets from the Canterbury earthquake has been revised up to around $12 billion (in 2011 prices) from the previous $7 billion. (See ‘Economic Impact of the Canterbury Rebuild’ box for full details.)
In addition to the impact of the Canterbury rebuild, business investment receives ongoing support from low domestic interest rates, and a high exchange rate making imported capital equipment cheaper, during much of the forecast period - particularly over the next few years. Annual business investment growth is forecast to increase at double-digit rates until late-2013. Investment settles around a historically-high share of real GDP (22%) across the forecast period.
Economic Impact of the Canterbury Rebuild
This box provides an overview of the Treasury's updated estimates of the economic impact of the Canterbury earthquakes.
Damage and rebuild cost estimates revised higher...
Following new information compiled by the Canterbury Earthquake Recovery Authority (CERA), the Treasury has revised up its estimate of the damage caused by the Canterbury earthquakes to $25 billion from $20 billion in the Budget Update (Table 1.3).
| Residential |
Commercial & Social |
Infrastructure | Total | |
|---|---|---|---|---|
| Budget Update | 13 | 4 | 3 | 20 |
| Half Year Update | ||||
| Cost of damage | 13 | 9 | 3 | 25 |
| Cost of rebuild | 14 | 13 | 3 | 30 |
Source: The Treasury
This revision reflects better information about the extent of damage to commercial assets, as well as the inclusion of damage to social assets such as schools and hospitals. As in previous forecasts, the revised estimates remain a working assumption with much uncertainty.
The damage estimates represent damage to property, contents, and infrastructure in constant 2011 prices. Allowing for improvements to the previous capital stock, the Treasury estimates that the total amount of fixed capital investment stemming from the Canterbury rebuild may be around $30 billion. Factoring in additional costs such as business disruption and contents insurance could lift the total cost of recovery higher still.
...although the rebuild is not expected to be completed during the forecast period
- Figure 1.9 - Canterbury rebuild profile
- Source: The Treasury
As in previous forecast rounds, resource constraints in the wider economy mean that not all of the rebuild-related investment is incorporated into the Treasury’s economic forecasts. Overall, just over half of the total expected rebuild cost is factored into the Half Year Update forecasts for the period ending June 2017.
The Treasury assumes that priority will be given to infrastructure and residential investment. All of the infrastructure activity is incorporated into the forecast period, while most of the expected residential rebuild activity is assumed to be completed before June 2017 too. Around $3 billion of commercial and/or social investment is incorporated into the Half Year Update forecasts.
