Recovery interrupted - Quarterly Predictions, March 2011

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New Zealand Institute of Economic Research
Media release, 1 March 2011
Embargoed until 1am Tuesday, 1 March 2011

Barely any growth in 2011

“The recovery has been deferred. We have revised down our 2011 growth forecast from 2.3% to 0.3%. Around half of this revision is from underlying weakness in the economy, which will be compounded by a synchronised spike in food and fuel prices. The other half is due to the devastating earthquake in Canterbury” NZIER’s Principal Economist Shamubeel Eaqub said.

We expect the RBNZ to hold the OCR unchanged at 3% through 2011. There may be a need for rate cuts, but the RBNZ should fully assess the economic fallout before doing so.

The details are in NZIER’s March 2011 Quarterly Predictions – a comprehensive and independent commentary on the New Zealand economy and forecasts covering the next five years. Details and insights are available exclusively to NZIER members.

Canterbury earthquake will cause a substantial drop in output

The financial and economic costs of the second earthquake in Canterbury are not yet clear but will be significant. Canterbury represents a significant portion of the national economy, with around 15% of national employment. Daily lost production is equivalent to 0.1% of national quarterly GDP. Delays in rebuilding will reduce GDP by around 0.5% each quarter. 

Cautious and considered policy response needed

A targeted fiscal policy response to the Canterbury earthquake will be required. This should include welfare assistance for households and businesses, and accommodation supplement type payments for mortgage and rent relief.

Monetary policy can do little; 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 RBNZ to wait and assess the situation.

Fiscal position should and can bear the additional cost of reconstruction

The Government will face additional costs from the earthquake. However, we do not believe this will reduce the government’s credit worthiness. Even with additional spending we estimate net debt will peak at around 40% of GDP. This is still low compared to our peers. The Government can also reduce the impact on its fiscal position by re-prioritising capital projects, continuing to re-examine inefficient and costly policies and imposing a one-off levy to help fund the rebuilding of Canterbury, as happened in Australia following the Queensland floods. 

For further information please contact:
Shamubeel Eaqub, CFA
Principal Economist
+64 4 470 1810
+64 21 573 218

A significantly revised outlook

This chart is taken from Quarterly Predictions. The blue line shows actual and our forecasts of economic growth. The grey line shows the average growth forecast of all economists before the impact of the Canterbury earthquake and recent spike in food and fuel prices. We expect a significantly weaker economy in 2011. 

Sharper higher oil prices could derail global and economic growth

This chart is taken from Quarterly Predictions. Real oil prices have risen sharply following geopolitical tensions in the Middle East. Oil prices are now at the highest level since the late 1970’s and 2008 spikes. Synchronised spikes in fuel and food prices could weigh on local and global economic growth.