AFTER September’s earthquake in Christchurch, New Zealand’s Prime Minister, John Key, and economists were quick to hail the positive impact rebuilding activity would have on economic growth.
This time is different. Lives have been lost. But it remains true that rebuilding efforts, which will be far larger this time around, could very likely be the factor that ultimately pulls New Zealand out of recession.
That is cold comfort indeed.
The land of the long white cloud has lived under the shadow of recession for nearly three years. Some analysts say the New Zealand economy is in a “triple dip” recession, experiencing three distinct periods of contraction: before the global financial crisis, during it and in the second half of last year.
New Zealand racked up its first quarter of “negative growth” – that is, the economy shrank – in the March quarter of 2008. Very high dairy prices had encouraged the country’s dairy farmers to binge on debt, going on a buying spree of neighbouring farms and property. But when global milk prices fell, they were left high and dry, trying to pay off their loans with dwindling revenue. House prices also suffered, tumbling about 10 per cent in 2008.
When the global financial crisis struck in late 2008, further depressing growth, New Zealand was hit again. With the country having been in recession since the start of the year, the government was quick to move with stimulus spending, which helped for some time to cushion growth.
However, towards the end of last year, growth faltered once again partly due to the September quake and partly due to a failure of private spending to make up for the withdrawal of public spending.
Economists at TD Securities tip the next growth figures will show the New Zealand economy contracted in the final six months of last year, meeting the “triple dip” recession criteria.
Making life harder for the Reserve Bank of New Zealand governor, Alan Bollard, are concerns that rising dairy prices will cause an inflation breakout. Dairy is to New Zealand what iron ore or coal is to Australia. Rising commodity prices mean more income sloshing around the economy and risks of rising consumer prices.
Indeed, within just a few hours of this week’s earthquake, New Zealand dairy processing company Fonterra – the world’s largest exporter of milk – announced an increased payout for dairy farmers. At a band of between $7.90 and $8 a kilogram of milk solids, it will most likely break the record payout for New Zealand farmers of $7.90 a kilo.
The RBNZ had begun lifting interest rates early last year in a bid to head off any inflationary pressure. After the earthquake, the central bank is likely to leave interest rates on hold. Speculation of interest rate cuts seems to be an overreaction, given the continued commodity boost to the economy. And then there is the impact of rebuilding from the quake.
We have more in common with our New Zealand brothers and sisters than you might have thought.
THE IRVINE INDEX 26/02/2011
Portion of New Zealand economy represented by the Canterbury region including Christchurch.
Western Australia’s share of the Australian economy.
Speculated damages bill from the earthquake in Christchurch.
Damages bill from the September quake, including $NZ1 billion to infrastructure, $NZ1 billion to commercial buildings and $NZ3 billion to houses and cars.
Fall in New Zealand house prices in 2008. They have been fairly flat ever since.
What you can buy with one Australian dollar.
What you could buy with one Australian dollar four years ago.
Jobless rate in New Zealand.
Jobless rate in Australia.
Inflation in consumer prices in New Zealand last year.
Consumer price inflation in Australia last year.