Earthquake flattens already weak economic outlook: NZIER

New Zealand Army Territorial soldiers clean up earthquake damage in Avonside, Christchurch. Photo / Brett Phibbs

The economy will now barely grow at all in 2011, because of a "noxious mix" of spiking global petrol and food prices along with the impact of the second Christchurch earthquake, says the New Zealand Institute of Economic Research.

Consistently both gloomier and more accurate in its predictions than most other forecasters over the last year, NZIER now believes the economy will grow only 0.3 per cent in 2011, down from its earlier forecast of 2.3 per cent.

"Around half this revision is from underlying weakness in the economy, which will be compounded by a synchronised spike in food and fuel prices," said the institute's principal economist, Shamubeel Eaqub, who warned that forecasting was particularly difficult at present.

"We are seeing unprecedented levels of uncertainty and disruption, partly from Canterbury, and partly from the sheer length of time this recession has dragged on."

Even so, NZIER suggests that a Reserve Bank interest rate cut would achieve nothing because interest rates are already very low, and the Christchurch earthquake cannot be fixed through monetary policy.

"Canterbury's problem is not interest rates," said Eaqub.

"Lower rates will not fast-track safety checks, insurance assessments and payments, or rebuilding.

"At best it may provide a temporary boost to consumer and business confidence. We believe it would be better for the Reserve Bank to wait and assess the situation."

The February National Bank Business Outlook survey of business confidence, released yesterday and taken before the latest quake, showed business confidence across the country was improving.

Eaqub said NZIER saw no prospect of additional inflationary pressure in the economy since the central bank would "look through"

price shocks caused by fast-rising fuel and food prices, while those higher prices would themselves discourage other spending, thereby damping inflation.

While it was too early to judge the final impact of the latest earthquake, it would be "significant".

Canterbury accounts for about 15 per cent of the New Zealand economy, so that daily lost production was equivalent to 0.1 per cent of quarterly gross domestic product, while delays in rebuilding Christchurch would reduce GDP by around 0.5 per cent in each quarter this year.

Eaqub said there was a strong case for the government to borrow specifically to get Christchurch back on its feet. Adverse reactions from global lenders were unlikely because even if New Zealand's net public debt went to 40 per cent of GDP, which was still low by comparison with its peers.

Much has been made in recent times of the potential for New Zealand's very high levels of private foreign debt to lead to a collapse in investor confidence in the country. However, government debt is relatively low.

The government might also choose to delay some infrastructure projects and impose a one-off levy to help fund rebuilding, as had occurred in Queensland after the recent flooding there.