Building surge after disruption

Saturday's Canterbury earthquake could wipe 0.6% off the country's economic growth in the short term, but the reconstruction could boost growth by 1.5% in the coming year, economists say.

There is also a fear the quake could tip over some small and medium-sized Canterbury businesses that were already struggling financially.

Meanwhile, ratings agency Standard and Poors has placed the Christchurch City Council and its subsidiary, Christchurch City Holdings, on credit watch with a negative bias, due to its exposure to infrastructure costs.

ASB chief economist Nick Tuffley said after initial disruption to Canterbury businesses, there would be a surge of building and retail activity as companies and residents rebuild and repair buildings and replace lost and damaged items.

Canterbury's gross domestic product was the country's second largest at $27 billion, representing 15% of the country's GDP, and Mr Tuffley estimated that a $2 billion repair bill would cost the country slightly more than 1% of GDP.

Demand for goods and services for rebuilding would be inflationary but Mr Tuffley said the Government's policy targets agreement allowed the Reserve Bank to take account of temporary inflationary impacts such as natural disasters.

Markets were reasonably neutral yesterday, which Mr Tuffley attributed to the swift response to the disaster which did not overwhelm emergency services or political leaders.

"That, more than anything, is what will minimise the economic cost of the huge disaster that Canterbury woke up to [on] Saturday morning."

The Government was likely to be called on to assist councils rebuild infrastructure, which Mr Tuffley said could mean it needed more short-term funding.

A Westpac analysis said the Government has historically promised to cover 60% of the cost of restoring local government infrastructure, some of which was uninsurable.

The 2009 Christchurch City Council's annual report valued its infrastructure assets at $3.1 billion and with reports that most of the damage was in the central city, Westpac calculates infrastructure damage to be worth $200 million.

Crown core debt as at May 2010 was $52.6 billion, or 28% of GDP, and the bank said repair costs of $1.5 billion to central Government from the disaster were manageable.

ANZ chief economist Cameron Bagrie said rebuilding Canterbury would not be an economic jackpot because supply and capacity constraints would limit how fast it could happen.

"Or put it another way, where are the resources to undertake that sort of construction going to come from?" He said there would be a displacement effect on other industries such as tourism, as builders and workers were called in to the quake zone.

Christchurch was the gateway to South Island tourism, accounting for 22% of all offshore arrivals, and Mr Bagrie said while tourists would still pass through the city on the way to other South Island destinations, Canterbury tourism would be affected for some time.

Small and medium-sized businesses would be the hardest hit, he said, because they did not have the resources to bounce back and many were already struggling with weak balance sheets.

Mr Bagrie agreed that the Reserve Bank would have to look carefully at the economic impact of the rebuilding, but was still predicting a rise in the official cash rate initially for December, but possibly out to the first quarter of 2011.

S&P announced yesterday that the AA+ credit rating held by Christchurch City Council and its subsidiary, Christchurch City Holdings, was on credit watch with negative implications pending further analysis of the financial consequences of the earthquake, but noted the city's debt levels were high for its current rating.

In a statement, S&P said debt levels were already at a point that could warrant a rating reassessment.

It said New Zealand's sovereign credit rating and that of Christchurch International Airport were not affected by the earthquake.