Quake rebuild will eat into GDP

REGROUPING: Christchurch was devastated by a large earthquake in February, which claimed 181 lives.

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Rebuilding Christchurch

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Reconstruction after the Canterbury earthquakes is likely to eat up about 7.5 per cent of 2011 GDP, according to the International Monetary Fund.

The IMF's estimates that the rebuild in Christchurch will cost about $15 billion, which makes it a heavier burden on the national economy than Japan's 1995 Kobe quake (6.5 per cent) and Chile's big quake last year (2 per cent), as well as the recent Japan quake.

''While the scale of damage from the recent Japan earthquake is still uncertain, it is likely to be less than the Canterbury earthquakes as a percent of GDP,'' the IMF's latest report on New Zealand said.

The $15b cost is comprised of $9b for residential buildings, $3b for commercial  buildings and $3b for infrastructure.

In the near term, the quakes have slowed activity, cutting an estimated two percentage points off economic growth this year with real GDP growth projected at 1 per cent in 2011.

The quakes have disrupted economic activity, reduced wealth and weakened confidence, the IMF said.

''The earthquakes destroyed assets equal to about 2 - 3 per cent of the nation's productive capital stock, and will have temporarily reduced potential output,'' it said.

However growth is forecast to rise to 4 per cent next year, led by reconstruction. Aftershocks, demolition and land stabilisation work suggest that reconstruction won't start until later this year or early next year.

IMF staff assume four fifths of residential and infrastructure rebuilding will be completed by 2016, while commercial rebuilding continues beyond this.

Christopher Legg, the IMF's executive director for New Zealand, said the impact of the quakes on the national balance sheet will be much more muted due to foreign reinsurance flows of around $10b.

''As a result, the economy and financial system has remained resilient.''

Although business and consumer confidence declined sharply following the February quakes, confidence has since rebounded and disruption of economic activity is confined to the Canterbury region.

''At this stage, the disruption to the economy is expected to ease progressively over the next six months,'' Legg said.

The report also warned that economic risks were tilted to the downside, including a faltering of emerging Asia's rapidly growing demand for commodities and a possible rise in long-term interest rates.

It also said the New Zealand dollar was slightly over-valued and that housing also seemed over-priced.

It recommended monetary policy would need to be tightened to contain inflationary pressure and a return to fiscal surpluses by 2014/15 of earlier if feasible, despite the costs of the quakes.

- BusinessDay.co.nz