New Zealand is likely to be in recession for the first six months of this year as the earthquake wipes off about 2% of the nation's economic activity through lower GDP.
Westpac chief economist Brendan O'Donovan said the February 22 earthquake wrought a terrible human toll and had dealt the economy a serious blow.
"The sheer scale of disruption to lives in Christchurch has punched a serious hole in the local economy. There have been knock-on effects for the rest of New Zealand as quake-affected Canterbury purchases less from other regions."
It was too early to tell with any degree of accuracy, but at this stage the best estimate of loss to New Zealand economic activity this year was $4 billion, Mr O'Donovan said.
That assumed Christchurch's annual economic output would shrink 15%, and implied 2% would be wiped off New Zealand's annual GDP in the first year.
Negative GDP growth in the March quarter was virtually assured and there was little prospect of a better performance in the June quarter.
Two consecutive quarters of negative activity was technically a recession.
Mr O'Donovan said Westpac's annual GDP growth forecast for the year to June 2011 was now 0.5%.
"We expect job losses associated with the earthquake will cause the unemployment rate to rise to 7% from 6.8% currently."
Given the economy was already in such a weak state, Mr O'Donovan expected the Reserve Bank to respond by cutting the official cash rate by 0.5% tomorrow to 2.5%.
The proposed cut would do little to help Christchurch, but that was not the point, he said.
"The point is to shore up confidence at a time when the economy's near-term prospects have been knee-capped, thereby stabilising the growth and inflation outlooks."
Craigs Investment Partners broker Chris Timms said Reserve Bank governor Alan Bollard had a record of "getting stuck into the OCR" during times of financial crisis.
During the global financial crisis in 2008 and 2009, Dr Bollard cut the OCR from 8% to 2.5% in seven adjustments, some as large as 1.5%.
However, cutting taxes or increasing Government spending was probably more appropriate after the earthquake, he said.
"Is cutting the OCR going to push people back into spending? It may make them just save more and we are already well ahead of savings targets."
