Quake to cost $15b, GDP to take a 1.5% hit - Treasury

The Christchurch earthquake will cost up to $15 billion and will also knock gross domestic product growth back by 1.5 percentage points and tax takes will be also be down, Treasury estimates but predicts a silver lining in 2012 as rebuilding gets underway.

The 1.5 point hit to growth could see GDP down $15 billion lower over the five years to 2015.

"We estimate that GDP growth will be around 1.5 percent points lower in the 2011 calendar year solely as a result of the February earthquake," Treasury said in its monthly economic indicators for February.

"From 2012, the recovery will bring a sizeable boost to residential, commercial and infrastructure investment, placing upward pressure on prices depending on the rate of rebuilding."

Finance Minister Bill English said the preliminary assessment confirmed the need for the Government to carefully consider its priorities.

"At this early stage, our immediate focus is on getting good information about Christchurch's requirements, and that will tell us more about the scope of the prioritising we need to do," Mr English said.

Treasury said the earthquake had a large cost in human and economic terms and emphasised its estimates were early and tentative.

"The outlook for the New Zealand economy was weaker even before the earthquake as domestic demand was soft despite income gains from high commodity prices.

Treasury said domestic developments occurred against an international backdrop of political unrest, high commodity prices and rising inflation.

"Even before the February earthquake, it was apparent that the economy was weaker in the second half of 2010 and early 2011 than we had expected in last year's Half Year Update. Growth in the second half of 2010 was weaker than previously expected and the recovery from the September earthquake was slower than we assumed, reflecting the extent of the damage, ongoing aftershocks and the complexity of the repairs and rebuilding."

That weakness extended into the start of this year as households and businesses were cautious.

"New Zealand's terms of trade stood at their highest level since the early 1970s in the December quarter 2010, but firms (especially farmers) are consolidating and not spending their additional income. Labour demand was weak in the December quarter and private consumption appears to have fallen slightly."

Treasury said the cost of the quake was likely to be two to three times greater than that of the $5b September quake.

"Allowing for some double counting for cases where prior damage has been compounded, we estimate the combined financial cost of the two earthquakes at around $15b."

Mr English said paying for the earthquake was likely to involve "a bit more borrowing in the short term" and reprioritising spending.

The Government was working through the impacts of the earthquake on GDP and the flow-through to tax revenue.

"But based on these early assumptions, the total loss of tax revenue from all of these factors could be in a range of $3 billion to $5 billion over the five years.

"This is manageable in the context of the Government's revenue base of about $330 billion over the five years.

"It's clear that the earthquake will have an impact on the Government's finances - through both increased costs and reduced tax revenue.

"We will work through those issues carefully as we prepare for the Budget over coming months," Mr English said.

Treasury said unemployment rates were unlikely to fall significantly over the next six months but the earthquake recovery may provide longer term additional employment.

A current account surplus was expected in March for the first time since 1973. The temporary surplus reflected higher current transfers from September to March because of reinsurance payments related to the quakes.

The current account deficit would return in 2012 partly due to the country's overseas debt and higher interest rates.