The Christchurch earthquake has done significant damage to the already fragile economic recovery in New Zealand.
The September 2010 earthquake had a major impact on NZ economy, but its effect was less severe. It was estimated to be around 5 billion dollars at that time. Though no accurate figures are available about loss from this quake, experts feel it will be at least 15 billion. The impact on economy will be severe in short term.
The economic growth was fragile even otherwise, but now one important economic area, Canterbury will not contribute to country’s growth for many months to come. The consumer confidence will weaken resulting in lower spending.
There is also fear that many of Canterbury residents may leave the region forever, with few migrating to other parts of country and few to other countries. If these fears become true, Canterbury economy may be in bad shape for years to come.
Economists are calling for immediate cut in OCR by Reserve Bank. They feel, it to be of some use, it should be a cut of 50 basis points. In anticipation of the same, most of New Zealand banks have already lowered their short term fixed mortgage rates.
Though, decrease in mortgage rates will help house owners to some extent, but they should brace up themselves for significant increase in insurance premiums. Not only Earthquake commission levies will go up, but also the cost of reinsurance for our local insurance companies will increase. The international re -insurers will re assesses New Zealand risk and may significantly increase cost of re insurance.
Coming to international markets, crude oil prices are on the rise. Crude briefly crossed $100 per barrel before retreating (at the time of writing this column). Major cause of it had been unrest in Middle East.
But even otherwise, trend looks to be upward; it will not be a surprise if crude oil prices touch $150 per barrel in near future. Inflation is picking up in Europe, which may result in increase in interest rates in those countries. Rising interest rates in other countries, but lower in New Zealand may put downward pressure on Kiwi dollar. Though it will help our exports, it will make imports including fuel even more costly. Rising costs of fuel will burden common man. Discretionary spending may be cut by them to cover increased fuel costs, keeping the growth slow.
If we look beyond 12 months, it seems economy will improve. Lot of reinsurer money will flow into New Zealand economy. Re construction of Christchurch will begin. The world commodity prices are already high. Lower Kiwi dollar will help exporters and their purchasing power will increase. With increased economic activity, inflation will start picking up, so interest rates may start jumping sharply in 2012.
The immediate need is to boost consumer confidence and to stop migration of people from Christchurch. Already, big businesses have pledged their support to Christchurch. The Government can give these tax breaks to help those who stand up again. Also Government should think about having an immigration policy specifically for Canterbury region. The new immigrants under that category may be required to live at least first 7 years in that region. Reducing requirements of degrees and English proficiency tests, people needed in Christchurch should be encouraged to migrate there.
Interest rate expectations
Reserve bank is expected to keep the OCR low for at least 12 months. Interest rates in international markets may increase during that period of time. So over coming months, the gap between short term and long term rates will increase.
Ravi Mehta is an Auckland based Financial Advisor and can be contacted on firstname.lastname@example.org. A disclosure statement under Securities Markets Act relating to his services is available on request and is free of charge.