Flood-damaged food inside the Pak'nSave store on Porana Ave, Glenfield on Sunday. Photo / Krishan Wijesooriya
Flood-damaged food inside the Pak'nSave store on Porana Ave, Glenfield on Sunday. Photo / Krishan Wijesooriya
The weekend’s flooding will add to inflation pressure in the short term, but is unlikely to change the big picture for the Reserve Bank, economists say.
“This weather event is primarily a supply shock for the economy,” said ANZ chief economist Sharon Zollner.
While it was still extremely early toassess the economic impacts (with the event still going on) overall it looked inflationary, she said.
That supply shock could mean short-term price spikes for fruit and vegetables, rents, transport, construction and even cars, ANZ said.
“A large number of cars have been written off, and car retailers [eg in Wairau Valley] have seen their stock destroyed.”
On the demand side, events like flooding and other natural disasters typically had an impact on economic confidence and people’s wealth, due to under-insurance, Zollner said.
Some of this inflationary pressure would be transitory, such as the potential for a period of fresh produce scarcities to boost food prices temporarily, said ASB chief economist Nick Tuffley.
“A large private insurance bill could also boost general insurance costs, something that happened after the Canterbury earthquakes changed the risk perceptions of NZ and the cost of reinsurance used to pass some of the disaster risks beyond Australasia.
“Construction costs could get boosted, to the extent that resources get heavily diverted into repair and remediation work.”
Thousands of properties (reports of at least 5000) will need to be assessed for flood or landslide damage, BNZ senior economist Doug Steel said in his Market Outlook report.
The Insurance Council has said it is too early to estimate what the insured losses will be, or the uninsured losses although some experts have estimated the total bill will approach $1 billion.
“Overall there will be significant disruption to normal spending, activity, and logistics in the near term,” Steel said.
History suggests that the immediate aftermath of a disaster event can actually boost economic growth temporarily, despite being bad news and costing the economy overall.
The phenomenon is sometimes called the “broken window fallacy” as the stimulus effect masks the fact that repairing things that break is ultimately a net cost.
But the timing of this supply-side stimulus is probably bad news in an economy already running at capacity and battling inflation pressure.
“Once the flood waters recede there is a major clean-up and recovery to take place boosting other types of activity to the extent that the supply side can oblige,” Steel said.
“Do not underestimate the latter point, given the constraints on activity prior to the weekend, some repair and recovery might well take a long time.”
The near-term hit to spending, activity, and confidence might add to the case for the RBNZ to lean toward somewhat easier monetary conditions than would otherwise be the case, he said.
“However, this event will likely be inflationary, in the first instance, given disruptions to already strained supply. “
Monetary policy authorities should also be looking 12 to 18 months ahead given the lags in policy influence, Steel said.
“That said, the RBNZ has seemed to be putting more weight on current conditions than forward-looking indicators.
“If the Bank is already thinking the February decision is a close-run thing between a 50 bp and 75 bp hike, the near-term disruption and presumed confidence hit from the storm could, conceivably, be enough to tip the balance to a 50-point move.
“We doubt, however, that the storm will be a deciding factor.”
Nor did financial markets which took the weekend’s flooding in their stride yesterday, he said.
The New Zealand dollar has been little changed - remaining a bit below the 0.65 mark against the US dollar.
A NZ Post van consumed by flood waters in Kaukapakapa. Photo / Michael Craig
As regards the February OCR decision, the impact of the floods could go either way, said ANZ’s Zollner.
“On the one hand, it’s likely to be a net inflationary event, albeit temporarily. On the other hand, it’s another potential blow to confidence, and smacking the economy with another 75bp rise at such a time might look a little tone deaf.
On balance, we don’t think it’s likely to play a big part in the decision.”
It would also take time to assess the full impact on the primary sector too, Steel said.
It was “simply too early” to know the extent of production loss and/or delay but extreme weather was negative.
“We say this noting that while the North has received far, far too much rain in places, it is the opposite down south where drought conditions are threatening some,” he said.
“These are very different circumstances. But neither is helpful to the economy, while both can be inflationary.”
“Despite the upheaval for many over the weekend, some big economic forces are unlikely to change much over time as a result.
“Labour market conditions are one. We expect Wednesday’s figures will confirm that the labour market remained extremely tight and wage inflation strong.”
