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Christchurch quakes have little effect on NZ economy

Short-term economic impact of quakes small, academics say. 

NBR staff
Thu, 11 Jul 2013

Academics have confirmed the Christchurch earthquakes caused barely a ripple for the rest of New Zealand's economy.

New research from Victoria University of Wellington shows the quakes have not had a pronounced short-term economic effect on New Zealand.

“This lack of macroeconomic impact to date is not entirely surprising, given that previous research on large disasters in high-income countries has reached similar conclusions,” say the researchers, Professor Ilan Noy and Lisa Doyle, from Victoria’s School of Economics and Finance.

“For instance, the short-term macroeconomic consequences were also minimal after the 1995 Kobe earthquake in Japan and Hurricane Katrina in the United States in 2005.”

The Canterbury earthquakes were found to reduce consumer price inflation only moderately, with the first earthquake having a small, and short-lived, adverse effect on real gross domestic product growth.

No significant changes in net migration, private consumption, investment, exports, imports or government consumption were found.

Production quickly shifts

Professor Noy says one of the reasons most natural disasters do not have a large short-term impact on the national economy is that production quickly shifts to other regions and, at the same time, regional production actually increases due to disaster-related rescue, and the clean-up, rehabilitation and recovery processes.

“In a similar vein, the New Zealand Treasury is predicting that the sequence of Canterbury earthquakes in 2010–2011 will have a positive effect on economic activity once rebuilding gets under way.”

Professor Noy emphasises that the research findings do not suggest the earthquakes delivered benefits or were benign economic events.

“The increased economic activity is due to the need to replace assets New Zealand had before. This is not very different from the ‘broken windows fallacy’ identified two centuries ago by a French economist, Frédéric Bastiat, who pointed out that breaking a window will lead to increased production and income for the glassmakers and installers who receive their payments, but does not lead to any increase in welfare or wellbeing.

“There have also been offsetting shocks and policy changes that mask the effects of the earthquakes.

"For example, it is possible that the expansive monetary policy embarked on by the Reserve Bank offset some of the effects of the shock, and that a favourable terms-of-trade environment, especially high agricultural export prices, also contributed to a rapid New Zealand recovery.

"Without these countervailing forces, the New Zealand economy could have suffered worse.”

He says the earthquakes have had a more significant impact at the regional level, although further study would be required to get a full picture.

Last week Professor Noy was appointed Victoria University’s inaugural Chair in the Economics of Disasters, based at Victoria Business School.

NBR staff
Thu, 11 Jul 2013
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Christchurch quakes have little effect on NZ economy