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Monday, January 3, 2011

Cost of the Earthquake - RBNZ report

The headline news from the Reserve Bank's Monetary Policy Statement for December 2010 was that the total cost is now expected to reach $5 billion. Of this $3 billion will be for residential rebuilding and repairs, with the balance accounting for business and infrastructure repairs and rebuilding.

The Monetary Policy Statement, which covers all the key factors affecting the NZ economy, contains a section on the earthquake. That section includes a statement about the effect of the earthquake, along with information on the latest cost projections, estimates of the time that may be needed to carry out the repairs, and other impacts associated with the rebuilding activities. Some extracts from the report are below. The whole report can be found here.

The impact of the Canterbury earthquake

Initial impact

The short-term disruption to household and business activity following the Canterbury earthquake is estimated to have reduced GDP growth by 0.1 percent of GDP in the September quarter. This estimate is based on indications that rates of displacement of retail sales and manufacturing activity have been relatively modest. Further, the impact on some components of GDP is unlikely to be captured in the official data.

Rebuilding

Earthquake-related reconstruction spending is estimated to add around $5 billion to GDP (2.6 percent of nominal annual GDP). This is in line with updated estimates of damage to residential property from the Earthquake Commission (EQC). Most of this spending is assumed to occur over 2011 and 2012, with some pull-back in growth from late 2012 as reconstruction winds down. Uncertainty surrounds how the rebuilding will impact on other activity.

Residential building

Earthquake claims received by the EQC provide the best early indication of the likely total cost. Bank estimates of an average cost per claim generate a total residential rebuilding cost of about $3 billion.

It is likely that houses with minor damage will be repaired first, with the EQC aiming to settle claims below $10,000 by the end of this year. Given the relatively short lags involved in doing repair work, it is likely that some of these payments will translate to higher residential investment in the December 2010 quarter. At the peak of rebuilding, which we expect to be at the end of 2011, the level of residential investment will be lifted by nearly 20 percent, relative to non-earthquake related residential investment.

Infrastructure and commercial building

The Bank continues to assume damage of $1 billion to commercial buildings and $1 billion to infrastructure assets in the Canterbury region. To provide some context, the combined capital value of commercial and industrial property across the three affected council areas is about $15 billion, whereas the combined value of infrastructure assets is around $4.6 billion.

The timing of repair work is uncertain. Essential infrastructure repair is likely to be a priority, and this is assumed to occur in a relatively frontloaded fashion in the projection, with 85 percent complete by June 2012.

On the other hand, feedback from our business visits generally suggested that commercial rebuild could be a very drawn out process, and take several years. In addition, given the large amount of spare capacity in Christchurch City, it is possible that some businesses may relocate rather than rebuild. This projection assumes that only 50 percent of the commercial damage is repaired by the end of 2012.

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