The 2011 March quarter GDP figures were quite amazing when you think of the tragic earthquake in the Christchurch area last February. The economy grew 0.8% (0.4% forecast) which signifies that the economy outside of Christchurch is very strong. If you compare the data from the other recent natural disasters, being the Queensland floods and the Tohoku earthquake/tsunami, New Zealand has actually grown – see figures and graph below:
* Australia had a 1.2% drop
* Japan had a 0.9% drop
The NZ$ and QE3
Also the NZ$ keeps motoring ahead – yesterday reaching US$0.85. However, with the official cash rate at 2.5% one wonders what is the currency reacting to? Most likely it was:
*the better than expected Q1 GDP figures outlined above and
*the words of US Fed Chairman Ben Bernanke who strongly suggested the US economy was in need of some more serious antibiotics in the guise of QE3 – Quantitative Easing 3 in which the Fed bascially print money.
Bernanke indicated that QE3 would depend on two conditions, economic weakness beyond current expectations, and a renewed threat of deflation.
The Fed is charged by Congress with minimizing unemployment, and some of its critics say that current unemployment rate of 9.2 percent should be a sufficient reason by itself for the central bank to expand its roster of economic aid programs.
Mr. Bernanke noted that the scale of the Fed’s existing efforts was unprecedented. The central bank has kept short-term interest rates near zero for more than two years. It also owns more than $2 trillion in mortgage-backed securities and government debt, the legacy of its two asset-purchase programs to reduce long-term interest rates.
New York Times
Future worry for NZ economy
These figures indicate strong underlying growth in the NZ economy but there are concerns about capacity contraints if the economy is to grow more. And if this is the case there will be significant pressure on prices and a sooner than predicted OCR increase by the RBNZ.
I am off on holiday for a week and will resume service on Monday 25th July.
Kobe in 1995 (and affected regions)
* Was responsible for 12.4% of Japan’s GDP (gross domestic product).
* Caused $120 billion in damages
* Declined to 24.4% by the end of June
* The Nikkei 225 regained its pre-quake level by mid-December 1995.
* Kobe was one of the biggest ports in Asia and a very industrial part of Japan
Tohoku in 2011
* Area not as industrialised as Kobe so only affected 7.8% of Japan’s GDP.
* Bank of Japan immediately injected $85-billion into the markets to show support
* The effect was more emotional rather than effecting the economy; the earthquake was on a bigger scale but effecting less of the industrial parts of Japan
* But many companies supply lines affected e.g. Toyota and Honda
The Kobe earthquake had little long term impact on the economy compared to the recent Tohoku earthquake, was on a bigger scale resulting in many more deaths. Long term affect still uncertain. However, as the damage is bigger in the Tohoku earthquake (because of the tsunami) even though it has not affected Japans industrial heart, it will take longer for the economy to recover. Overall it is hard to predict the long term affects as we are not able to say how the economy is going to be for the next year; considering Japan is still dealing with the nuclear radiation issue.
Nikkei stocks – affect of Tohoku and Kobe quakes
With the huge earthquake and tsunami in Japan one wasn’t surprised that there was an increase in demand for gold. Investors generally buy gold as a hedge or safe haven against any economic or political event. In this case a natural disaster. Below is the price of gold – notice the increase in price to US$1431.60 per ounce.
This event reminded me of a scene from The Corporation DVD with Carlton Brown, a commodities trader at the NYSE. He describes the tragedy of 9/11 as a blessing in disguise because for some people, it translated into great riches. Brokers celebrated the death and destruction of the Iraq war because “in devastation, there is opportunity”. An unfortunate way to look at how the market sometimes works when you consider the death and devastation in Japan.
Not surprisingly estimates of the rebuiding operation are in excess of the $4bn that has been projected for the September earthquake. The NZ$ dropped by more than a cent against the US and finished the day below US$0.75. This is on the back of Fonterra announcing an increased payout to farmers.
The earthquake could also mean pressure on the Reserve Bank to loosen monetary policy (cut interest rates) to brace the economy which may have slipped back into recession at the end of 2010. Some economists have said that it may wait till December before tightening monetary policy. Remember that the OCR at 3% is considered to be stimulatory but one wonders what the neutral rate is – when neither stimulatory nor contractionary – maybe 4%.
Although the NZX-50 dropped 23.2 points to 3358.7, shares in Fletcher Building rose yesterday – they are managing the repairs to buildings damaged by the September earthquake.
The latest Treasury estimates put the cost at around 4 billion dollars, approximately half of which is the Earthquake Commission’s estimated liability. The remainder is divided among insurance companies, central and local government, households and business owners (some of the cost will be met by reinsurance policies). Furthermore, it is estimated that the earthquake will wipe around 0.5 percent from gross domestic product in the September 2010 quarter (although they do note that there is a lot of uncertainty around this figure). According to the NZIER (New Zealand Institute of Economic Research), the Canterbury region contributes around $27 billion to New Zealand’s gross domestic product (approximately 15% of national GDP). There may also be a short term inflationary impact, as demand for certain goods and services outpace supply (e.g. tradespeople such as builders and electricians), although there is currently spare capacity in the building sector. Concerns have been raised about the impact on confidence. Any sizeable fall in confidence could lead to a reduction in consumption and investment expenditure, adversely affecting economic growth (and employment).
There was no significant impact on either the exchange rate or sharemarket (although the price of building related stocks rose, and insurance stocks fell). There is a real risk that some businesses will fail in the short term, due to:
(i) an inability to effectively operate due to damage or lack of supplies, and
(ii) a reduction in demand.
Adapted from the Monthly Economic Review September 2010 – Parliamentary Library Reserach Paper
If you read Brian Fallow in the Hearld this morning you will have come across some opinions of leading economists with regard to the economic impact of the earthquake. Canterbury contributes 15% of the New Zealand’s GDP but according to Nick Tuffley (ASB Chief Economist) every week of Canterbury operating at half capacity would shave 0.14% off GDP – approx 0.6%/month . It is generally regarded that in the longer-term the earthquake will boost GDP in the district. Fortunately the building sector has spare capacity unlike a few years ago and this should mean lower prices charged by suppliers. Some talk of the effects on tourism as well as the loss of business by supply disruptions to customers. Click here for the full article.