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New Zealand: Economic forecasts cut as second earthquake rocks Christchurch

February 22, 2011

On 22 February, a devastating 6.3-magnitude earthquake shook Christchurch, New Zealand's second-largest city. It was the second major quake to hit the city within a year, resulting in a death toll of over 160 people and causing far more destruction than the 7.1-magnitude tremor that struck Christchurch on 4 September last year. While the city was still coping with the aftermath of the September 2010 earthquake, which brought with it an estimated bill of NZD 5.0 billion (2.7% GDP) in damages, the February tremor is expected to cost two to three times more. According to the Reserve Bank of New Zealand (RBNZ) and the Treasury Department, the total cost of the February quake will likely reach NZD 15 billion (8.0% of GDP). Reconstruction efforts, which will add to the country's fiscal burden, are to be shared between private insurers, the Earthquake Commission disaster fund and the government. On 20 March, the government announced it will cut spending programs rather than raise new taxes. Furthermore, the earthquake will have a broader negative impact on economic activity this year. According to the RBNZ, February's earthquake has more than offset the protracted recovery that began last year and has caused significant disruption to business activity in the Canterbury region (which accounts for about 15% of New Zealand's economy). In addition, the damage to infrastructure, as well as to commercial and residential buildings will inevitably dampen production and spending in the months to come before the reconstruction efforts begin to rekindle economic activity. Consequently, monetary officials and the Treasury Department have cut their GDP growth projections for the fiscal year 2011 (ending March 2012). The Reserve Bank expects GDP to expand only 0.9% this fiscal year, down from the previous estimate of 1.7%. Moreover, the Treasury anticipates that the economy will grow 0.8%, which was down 1.3 percentage points compared to the previous projection. However, the assessment of both the Reserve Bank and the Treasury Department are subject to change, as considerable uncertainty remains.

Author:, Senior Economist

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