The Christchurch earthquake imparted the greater shock – by far – for the economy in February-March. But uncertainties about oil supplies resulting from political upheaval in the Middle East and North Africa were having adverse repercussions, too.
The Institute of Economic Research accordingly predicted sparse growth this year because of “noxious mix” of spiking global petrol and food prices along with the impact of the second Christchurch earthquake.
It revised down its 2011 growth forecast from 2.3 percent to 0.3 percent. Around half the revision was from underlying weakness in the economy.
The Reserve Bank rightly reminded us that the full economic impact of the earthquake will be much larger than GDP statistics show. GDP measures production, and makes no allowance for damage or depreciation to an economy’s capital stock. In Christchurch’s case, much of that stock had been destroyed.
The Treasury, meanwhile, was reckoning the costs of the earthquake would run to between $10 to $15 billion. The impacts, however, will be felt for years. Among them will be the effects of reprioritising government spending plans.
These could be blessing in disguise. The reprioritising gives good grounds for looking again at the benefits from hefty public investments in, for example, the Auckland rail loop, the Transmission Gully project and faster broadband.
But, more immediately, output from Canterbury is being lost and reconstruction from the previous earthquake delayed. Consumer and business confidence will be bruised.
Forecasting (a dubious business at the best of times) becomes much more complicated in these circumstances.
An American study of the long-term business recovery from the Loma Prieta earthquake and Hurricane Andrew, found the long-term recovery experiences of businesses were affected by various factors.
Among them: the economic sector in which business operates, its age and financial condition, and the scope of its primary market; direct and indirect disaster impacts, including physical damage, forced closure, and disruption of operations; and owner perceptions of the broader economic climate.
Uncertainty has been heightened by political events in the Middle East and North Africa. These were lifting commodity prices generally and oil prices in particular, while dragging down equity markets.
The Treasury, in its analysis of February economic indicators, warned of risk of prolonged higher oil prices (along with high commodity prices, especially for food) slowing the global recovery and increasing inflation pressures. Hence “considerable uncertainty” surrounded any set of economic predictions.
Those rising prices will constrain demand and erode consumer confidence, not only in this country but among our trading partners just when we need their export revenue to help trim our huge overseas debt.
Some commentators recalled how oil hit US$147 barrel in 2008 and food prices soared, then, too. Famine and food riots spread to several countries, prohibitive prices triggered the recession (the collapse of financial markets followed), and oil prices fell only when the recession stifled demand.
The Reserve Bank’s response to the earthquake and the slowdown it instigated was to lower the official cash rate. The resultant exchange rate easing made oil imports even more expensive.
But Finance Minister Bill English was untroubled. The impacts of fuel price rises on the New Zealand economy, including impacts on GDP, consumer spending, and the current account, would be adverse, but it was too early to say by how much.
The rise in prices at the pump had been boosted by recent weakness of the New Zealand dollar, but that weakness generally was beneficial to the economy.
True, sharp rise in oil prices would put pressure on households and take more resources from our economy to keep petrol and diesel flowing. But general lift in commodity prices meant better returns for our commodity exporters as well as for imports. The net impact is measured by terms of trade.
Overall, our terms of trade have lifted 25 percent in the past decade, English noted. New Zealand accordingly had been net beneficiary from the significant increase in commodity prices, including the price of oil. M
Bob Edlin is leading economic commentator and NZ Management’s regular economics columnist.
