New Zealand quake another blow to faltering economy

February 24, 2011

, CHRISTCHURCH, Feb 24, 2011 – The massive damage from New Zealand\’s earthquake is likely to hobble growth in an economy already teetering on the brink of recession, analysts say.

The repair bill facing the second city Christchurch after its second major quake in six months was estimated at up to NZ$11.5 billion ($8.6 billion) by US firm AIR Worldwide, which specialises in disaster modelling.

Another assessment from JP Morgan put the cost closer to $NZ16 billion, although Prime Minister John Key said it was too early to gauge the impact of this week\’s disaster.

However, with at least 98 people dead, all involved in dealing with the aftermath agreed that the damage was far more extensive than the 7.0 quake that hit Christchurch last September, weakening buildings but claiming no lives.

"Last time there was damage to (Christchurch\’s business district), it was nowhere near as widespread as it is now. Frankly it looks like a scene out of a horror movie," Key told the New Zealand Herald.

Key said the challenges faced by New Zealands\’ farming-reliant economy remained the same and vowed to rebuild Christchurch, but acknowledged that some businesses in the city may never reopen.

While the construction industry might find opportunities, AIR pointed out that business in Christchurch had virtually halted and infrastructure had been hit hard.

In addition to the loss of collapsed buildings, AIR noted that the structural integrity of surviving blocks in the city centre would need to be carefully assessed.

Bank of New Zealand head of research Stephen Toplis said Christchurch represented about 15 percent of New Zealand\’s economy.

"So we know from a numerical sense that 15 percent of the New Zealand economy has now stopped," he said.

Finance Minister Bill English said earlier this month that New Zealand may have suffered a mild contraction in the October-December quarter following a fall the previous three months, signifying a technical recession.

The economy was already struggling to shake off the impact of the previous recession from early-2008 until mid-2009. Moody\’s Analytics associate economist Katrina Ell said the earthquake was another hurdle.

"The recovery continues to face headwinds from households shunning spending in favour of saving and reducing debt," she said in a research note.

"Tuesday\’s tragic events could exacerbate this trend, condemning the New Zealand economy to another year of anaemic growth due to forces beyond its control."

English said New Zealand could absorb the cost of the reconstruction and he did not expect it to effect the country\’s credit rating.

"It\’s a setback but we can handle it," he said. "These are bigger costs, but we are in a sound enough position to handle it."

"Our economy is fundamentally sound. This is another knock, but we can take it."

The disaster is also expected to have an impact on interest rates, which the Reserve Bank had held at 3.0 percent since last July in an attempt to kickstart growth.

Westpac Deutsche Bank has predicted the central bank will slash rates by 0.5 percent at its monetary policy meeting next month to stop the economy stalling.

However, Reserve Bank governor Alan Bollard was giving little away in a statement after the quake.

"The Reserve Bank is working hard to assist the recovery as fast as possible in terms of access to financial services, and ensuring markets remain stable," he said.

Key said his long-term vision for the economy had not been altered by the disaster.

"The basic issues New Zealand faces, and the imbalances identified in the economy, are as relevant today as they were last week," he said. "So we need to become more export-oriented, we need to have higher savings rates and be more productive as a country."

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