Economy in good shape to absorb quake shock

SH1 toward Kaikoura from the south is a wild ride over cracked seal and gaping holes. Photo / Mike Scott

While it is early days as far as assessing the economic impact of last week's earthquake, early analysis suggests the Government is financially well placed to handle costs of up to $2.5 billion - or 1 per cent of GDP.

But while economists say the quakes won't put too much of a dent in New Zealand's growth story the costs could have big implications for the Government's discretionary spending in an election year.

"The mooted tax cuts for 2017 look unlikely . . . and the Government will now have less headroom for a pre-election lolly scramble," ANZ economists Cameron Bagrie and Philip Borkin conclude in their initial assessment.

A near term hit to GDP is also certain but looks "modest".

"We expect larger cash deficits and a slightly higher debt profile but we are talking about a margin-of-excellence tweak. At present, net debt is only 25 per cent of GDP and cash deficits are less than 1 per cent of GDP," they say.

The New Zealand dollar ended last week at US69.96c, its lowest point in four months, but traders see the fall as driven primarily by the focus on US interest rate hikes in December which are now seen as a near certainty.

The NZX-50 sharemarket closed for the week up 1.75 per cent for the week.

ASB economists note that damage estimates are still highly speculative but for illustrative purposes have pencilled in a figure of $2.5 billion - spread over several years.

Because of the largely rural location of the quake the major damages and costs are to infrastructure so most rebuild expenses will fall to the Government rather than private insurers.

The damage to State Highway 1 and the rail link around Kaikoura is likely to add significant short term inflation to transport costs. This, and the impact of rebuild activity in the upper South Island and Wellington, will put some upward pressure on overall inflation.

ASB estimates that inflationary effect would offset the short term GDP hit, meaning the Reserve Bank remains likely to leave interest rates on hold. However they note that if the economic disruption turns out to be greater than currently anticipated then it could increase the odds of a cut.

The short term stimulatory boost that an earthquake rebuild can provide to the economy is less helpful now than it was in 2011 when New Zealand was still recovering from the global financial crisis, ANZ economists note.

"The economy is now in a full-blown expansion as opposed to a recovery; the latter is easier to snuff out with negative shocks," they say.

"Finding the necessary resources will present challenges for the reconstruction effort; in a capacity-constrained economy the "boost" from a rebuild becomes negligible as you are merely shuffling resources around."

All the economists make the point that the impact to the Kaikoura region and North Canterbury will be enormous.

While the impact on national tourism earnings is expected to be limited, with other regions like the South Island's West Coast picking up the extra visitors, the Kaikoura region looks likely to see its economy badly disrupted for at least a year.

In the year to September international and domestic visitors spent a combined $120 million in the region. Tourist spending was worth nearly $1.3 billion to the entire upper South Island.

Any impacts will be shown in the next International Visitor Survey on February 17 (for the period year ended December 2016).

But overall the outlook for New Zealand remains strong despite the quake.

A report for investment bank UBS, released Friday as part of an Australasian assessment, notes some moderation in record migration and tourism may see GDP growth slow to around 2.6 per cent in 2017.

It notes the potential for this to be offset by rising dairy prices but makes no mention of the quakes as a material factor in its assessment.