Growth forecast dips as disaster repercussions are added to outlook

Shamubeel Eaqub. Photo / Brett Phibbs

Last week's earthquake was a blow to an economy already quite weak, says the New Zealand Institute of Economic Research.

In its latest quarterly forecasts it has cut the rate of economic growth it expects this year from 2.3 per cent to just 0.3 per cent.

Only about half that reduction can be put down to the earthquake, NZIER principal economist Shamubeel Eaqub said.

House sales, traditionally an excellent leading indicator, showed a sharp slowing in momentum, he said.

Domestic demand was already week as households focused on reducing debt. A soft labour market would restrain income growth.

And surging global prices for food and oil would crowd-out spending on non-necessities.

NZIER's forecast for New Zealand growth, feeble as it is, assumes the country's trading partners growing at around 4 per cent a year.

But unfolding events in the Arab world posed an additional risk both directly and through its potential effect on the global economy, Eaqub said.

Oil prices in real terms are the highest since 2008 and before that 1980 and New Zealand's oil consumption per unit of GDP had not reduced nearly as much since the 1970s as in other developed countries.

Eaqub expects the earthquake to shave about 1 per cent off gross domestic product this year, reflecting the disruption to activity in Christchurch and the delay to the rebuilding work required after September's quake.

The reconstruction task was now a much greater task and would take five to seven years, he said.

The Government's response should include welfare assistance for households and businesses, and accommodation supplement-type payments for mortgage and rental relief.

But a cut in the Reserve Bank's official cash rate would be of little help, Eaqub said.

"Canterbury's problem is not interest rates. Lower interest 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."

He does not believe the bank has an inflation problem to confront.

Strong increases in food and fuel prices crowded out spending on other things and reducing firms' pricing power elsewhere in the economy.

Eaqub is also sceptical about how much of a fillip the Rugby World Cup will provide for the economy.

International studies of similar events had found that estimates of the boost to economy activity made before the event tended to be much higher than those made after the same event.

"It will help, but it won't make the difference between being in recession or not."