Local Tourism and primary production impacted; losses offset by reconstruction activity; national impact minor

Supplied by The Treasury*

A magnitude 7.8 earthquake occurred in North Canterbury just after midnight on 14 November causing extensive damage and some loss of life in the Kaikōura and adjoining regions. The town of Kaikōura, which is an important tourist centre and on the main South Island road and rail network, was extensively damaged and transport links were blocked by large slips. There was also damage to housing in the region, as well as to commercial buildings and the port in Wellington.

While the impact of the earthquake and subsequent aftershocks on the region directly affected is significant, its impact on the economy as a whole is considered likely to be relatively minor at this stage. This special topic discusses the likely regional and national economic impact.

Regional economic impact considerable…

The impact of the earthquakes on the Kaikōura and surrounding regions is expected to be considerable. The industries most likely to be affected are tourism (hospitality and retail) and primary production (seafood, dairy and wine). The impact on tourism is expected to be more serious and longer-lasting than the impact on primary industry because access to Kaikōura has been restricted, accommodation, retail and hospitality facilities have been damaged and some tour operators are unable to function. Infrastructure in the town was also damaged.

In the primary industries, some dairy output has been lost as it could not be collected and processed, and the uplift of the seabed may affect the seafood industry for some time. Wine production in Marlborough may be affected by damage to storage tanks and transport to and from the region will be an issue for all industries.

Some effects are expected to be felt further afield as well. The extensive damage to the road and rail network in the north-east of the South Island will affect not only that region but also the transport of people and freight between other parts of the South Island and the North Island. The disruption of the transport links is already adding time and costs to freight and travel.

The earthquakes also caused damage in Wellington, with some commercial and retail buildings and parts of the port damaged. Business services, retail and hospitality industries have experienced some short-term disruption as a result and shipping was temporarily disrupted, with container services still affected. The extent of the damage to buildings is uncertain at this stage, with some buildings still being checked and two being demolished. The economic impact of this will be a loss of output, some of which will be caught up later or displaced elsewhere. Although the economic impact on the Wellington region is less concentrated than on the regions of the South Island, it may be greater because of the larger number of people affected.

There has also been extensive damage to housing in the area of the South Island most directly affected. While this damage has resulted in a loss of capital, on its own it will not result in lower economic activity, although it may lead to a shortage of accommodation for workers. A high proportion of NZ households have insurance cover and the first $100,000 (+GST) of damage is covered by the Earthquake Commission (EQC).

…but much less at a national level

Although the economic impact of the earthquakes at a regional level is expected to be considerable, their impact at a national level is expected to be much less. The region directly affected is less densely populated and accounts for a smaller share of national output and employment than the parts of Canterbury that were affected by the 2010 and 2011 earthquakes. The Kaikōura and Hurunui Districts, the areas most affected by the earthquakes, make up only 0.4% of the total New Zealand population, with Marlborough accounting for an additional 1% (Figure 1), whereas the areas directly affected by the Canterbury earthquakes accounted for around 10% of the total population.

Although the population of the town of Kaikōura is small (approx. 2,000), it is situated on the main South Island land transport network and a lot of tourists pass through it. On average over the past five years, approximately 125,000 international visitors (representing around 4% of all short-term visitors to New Zealand) stayed in the town. However, taking total spending into account, Kaikōura and Hurunui Districts together account for less than 1% of total tourist spending.

Some of the tourism activity lost to the region may be displaced elsewhere, subject to capacity in other areas. Overseas visitor arrivals to New Zealand have increased 21% in the past two years and some areas are operating at close to capacity, and if people are not be able to go elsewhere there may be some net loss.

There may also be a wider impact on tourism elsewhere in New Zealand as people cancel or postpone trips to New Zealand because of the disruption and/or risk of more earthquakes. This effect is thought to be relatively small and the impact on tourism will be much less than the Canterbury earthquakes in 2010 and 2011 which destroyed extensive facilities in Christchurch (e.g. hotels), reducing capacity in the industry as a whole. However, there is a risk that there could be a drop in overseas visitor arrivals in early 2017 as a result of the earthquakes.

Loss of output will be offset by repair and rebuilding activity…

The negative impacts of the earthquakes on economic activity are expected to be offset by repair and reconstruction activity in the short and medium term. The immediate recovery and clean-up will provide a small offset in the short- term to business disruption, while the longer-term rebuilding and reconstruction (e.g. of the road and rail network) will make a positive contribution to output over time. The reconstruction work will be included under government and business investment and residential investment.

Although it is only replacing capital which has been destroyed by the earthquakes, such activity counts towards economic output. As in the case of the Canterbury earthquakes, much of it will be financed by insurance payments (in the case of household and commercial damage) or by local and central government (in the case of public infrastructure and EQC payments).

…but it may still be relatively small…

However, rebuilding and reconstruction work may not add much to economic output in net terms, given that the construction sector is currently estimated to be operating close to full capacity. Reconstruction work may be at the expense of other work in the sector, making no additional contribution to output. An initial assessment of the impact on the government’s fiscal position will be included in the Half Year Economic and Fiscal Update to be released on 8 December.

…and other economic impacts as well…

There may be other economic impacts as well. Given that the economy is generally considered to be operating close to capacity (particularly the construction industry), additional demand may push up wages and the cost of materials. While this is the case for the construction industry as a whole, particularly residential construction, some resources may become free from horizontal infrastructure reconstruction as this work is completed in Christchurch at around this time. Additional freight and passenger transport costs may also have a temporary impact on inflation.

The earthquakes are not expected to have a significant effect on business or consumer confidence nationally as their economic impact is more limited than the Canterbury earthquakes and the economy is in a strong growth phase at present. Lower exports from tourism and primary production and higher imports associated with the reconstruction (and from higher fuel usage as a result of diversions) are likely to have a negative impact on the balance of payments.

…but national impact likely to be minor

Although the economic impact of the recent earthquakes on the region directly affected is expected to be considerable, their impact on the economy as a whole is expected to be relatively minor. The region directly affected accounts for a small share of national output and, while the impacts do reach further, they are much less than in the case of the Canterbury earthquakes. In the short term, there are both negative and positive economic effects, timing impacts, and possible displacement and diversion of activity to other regions and industries; in the medium term there will be positive effects from subsequent rebuilding and reconstruction, although the net impact of the additional work is uncertain at this stage.

*This article was originally published by The Treasury as a Special Topic in the November edition of their Monthly Economic Indicators.