Earthquake is another set back
Today another earthquake struck Christchurch. The quake was 6.3 on the Richter scale and follows last September’s 7.1 quake which did significant damage to the Canterbury region. Reconstruction following last year’s quake was expected to be a key driver of economic recovery this year, though subsequent aftershocks had delayed it. Today’s event will disrupt economic growth and also delay reconstruction efforts further, posing a downside risk to the interest rate outlook (though we do not expect a cut). Rebuilding will still boost the economy, though the risk is this will occur later than previously forecast.
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Facts
- Another large earthquake struck New Zealand at 1251 on 22 February. It measured 6.3 on the Richter scale (compared with 7.1 for last September’s quake).
- The human cost has been significantly larger than last year’s quake. At current estimate 65 people have been killed and many remain trapped. The larger death toll is likely to be due to its occurrence during the day, whereas last year’s quake occurred while most people were in bed (it occurred at 0435 and no lives were lost).
Implications
Natural disasters typically reduce the supply capacity of an economy and thus lower growth in the short term, as the economy is unable to function normally. Part of the capital stock is also destroyed. The economy is normally boosted in the medium term as reconstruction and repair takes place. We expect that today’s earthquake in Canterbury will lower growth in the short run, with economic activity disrupted and significant destruction of capital stock in the region. As it stood, the rebuilding effort following last September’s earthquake had already been hampered by persistent aftershocks – today’s event will further delay reconstruction.
There has been some discussion that rates could be cut in response to today’s quake. We do not think this is likely. Central banks in developed countries do not typically cut interest rates in response to natural disasters. Ostensibly there has been no damage to the financial system or payments system, emergency services and other government agencies are operating as they should to respond to the disaster and the financial system and government will be able to support a return of the economy to towards normal. Political stability is unquestioned. These factors are often not the case in developing countries where financial systems, political systems and governments are questioned as result of a natural disaster, and the remaining monetary policy tool might be used to respond.
In response to weakness in demand as a result of a sharp fall in confidence a fiscal policy response would be more appropriate. Moreover, with a backdrop of rising global inflationary pressures, partly due to increasing oil prices, and the overnight cash rate already around very low levels, we expect the RBNZ to remain on hold. We think the risk is they remain on hold for longer than we had previously expected as a consequence of the earthquake.
Bottom Line
Today’s earthquake will weaken near term growth, and hinder rebuilding efforts in Canterbury. We think it provides a downside risk to our previous expectation of a rate rise in Q2, but see little risk of a rate cut.
Article from HSBC
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