At this stage, economists remain divided on how weak 2011 will be.
Market-watchers see no prospect of an increase in the Official Cash Rate this year, even though at 3% it is at a level the central bank has previously called stimulatory. The devastating earthquake in Christchurch on Feb. 22 has put paid to that.
Instead, there are mounting expectations that Reserve Bank Governor Alan Bollard will cut the official rate when he releases his review of monetary policy next week. Prime Minister John Key fuelled the speculation by saying he expects a cut and would welcome it, causing a sell-off in the kiwi dollar.
The best way track market expectations for the OCR can be tracked by looking at the Overnight Index Swap curve. On that measure, before the quake hit, the smart money was on 50 basis point of increases to the OCR over the next 12 months. Now the curve has turned negative for the first time in two years as the market ponders at least one rate cut instead, perhaps this month.
The Reserve Bank’s problem is that projections for an upswing in the economy this year, made in its December Monetary Policy Statement, are now ‘out of the money’. It had forecast 90-day bank bills would be about 3.3% this month but in the wake of the quake they’re below 3%.
In fact, the economy had already veered off the RBNZ’s forecast before the Christchurch quake, with the surprise 0.2% contraction in the third quarter of 2010 compared to its estimate of 0.3% growth.
At this stage, economists remain divided on how weak 2011 will be. Estimates range from an anemic 0.3% pace of growth through to optimists who still see growth of more than 2% this year. Finance Minister Bill English says the cost of the latest earthquake could run to $15 billion, or three times the impact of September's shake, and there’s no doubt the reconstruction effort won’t be starting in earnest until the first half of 2012 at the earliest.
In the meantime, the national economy will miss a big chunk of the usual output from the Canterbury region, which accounts for about 15% of the economy. That will hurt tax revenue and the government's costs will rise, English says.
Bollard wasn't alone in seeing better times ahead before the latest quake shattered that view. Business confidence rose last month, according to a survey taken before the quake.
However, as is often the case, New Zealand remains a tale of two economies.
Households are still paying down debt and fretting about the value of their homes. Spiking food and fuel prices are likely to keep their discretionary spending in check. New home building has all but stalled, according to Fletcher Building, the nation's biggest construction company. Business investment remains weak.
And yet in a world increasingly worried about having enough food, the cornucopia of food commodities New Zealand sells overseas is attracting record export prices. That can only become more pronounced. The Fonterras of the world won't be able to keep pace with demand in markets like China and other emerging markets.
The quakes are a setback for New Zealand's recovery but don't constitute a derailment. As the rebuild of Christchurch gets under way again and the benefits of soaring export prices trickle through the economy, good times will return. What's changed is the timing.