The NZ dollar fell to its lowest level in 18 years against its Australian counterpart yesterday as pressure mounted for an interest rate cut at this Thursday’s central bank meeting.
In addition, the government and Prime Minister seemed to be signalling that spending on assistance might be higher than expected by the market.
Prime Minister John Key said he would welcome a rate cut and said at a press conference that it would be "helpful".
And he also said the government might buy damaged land as a way of helping property owners who faced difficulties rebuilding in Christchurch.
The Kiwi dollar fell to NZ$1.3737 against the Australian dollar in trading yesterday and touched NZ$1.3789 in trading. That’s the lowest it has been since June 1992, according to Bloomberg.
It was trading around $A1.3720 at the close of trading in Australasia yesterday
The NZ dollar traded at 73.77 USc from 73.83 last week when it reached 73.39c, the lowest since early last October.
In a TV interview, Prime Minister Key said that lower borrowing costs would be helpful to the country.
He also told the media conference that 10,000 damaged homes in Christchurch might have to be demolished.
That’s around 10% of the 100,000 houses that are damaged in and around the city.
And Mr Key warned that a number of heritage buildings would have to be knocked down.
He said some parts of Christchurch may never be able to be rebuilt on, mainly because of the liquefaction caused by the quake.
He indicated the government might have to buy some of these properties.
Finance Minister Bill English said that paying for the quake was likely to involve "a bit more borrowing in the short term" and reprioritising government spending.
He said early estimates were a loss of $NZ3 billion to $NZ5 billion in tax revenue 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."
That impact is slowly taking shape with the NZ Treasury saying on Sunday that costs from the quake may end up triple the estimated NZ$5 billion bill from the September quake.
The Treasury said that even before the February earthquake, it was apparent that the economy was weaker in the second half of 2010 and early 2011 than it 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.
"This weakness extended into early 2011 as businesses and households exercised caution despite the income gains experienced by commodity exporters from high world prices.
"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.
"It is against this background of a weaker performance of the economy in the recent past and a weaker outlook for the near term that the impacts of the February earthquake must be considered.
"The earthquake will have a negative impact on activity in the near term through its direct effect on activity, ongoing confidence effects and a further delay in the reconstruction from the September earthquake.
"However, it will have a positive impact on economic activity once the recovery phase gets into full swing in 2012.
"We estimate that GDP growth will be around 1.5% points lower in the 2011 calendar year solely as a result of the February earthquake.
"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.
"The earthquake has now set the recovery back further.
"We now envisage a small contraction in real GDP in the March 2011 quarter, whereas prior to the February earthquake we were expecting growth of around 0.5%.
"We expect disruption to continue into the June quarter, but because this disruption is likely to be less than in the March quarter we anticipate a return to positive growth (around 0.8%)."
But there is a silver lining. With the rebuild not expected to start until later this year and then step up in 2012, NZ faces several solid years.
The Treasury explained:
"The sheer scale of reconstruction work means that we expect rebuilding to continue after the end of the forecasts (2015).
"This is likely to mean that activity levels in the economy, and hence taxes, will also remain high for a period after 2015 because of the bigger size of the rebuild required."
For all those Australian companies operating in NZ, it’s going to be a tough year before there’s any sign of an upturn.
