The short-run nationwide macroeconomic effects of the Canterbury earthquakes

Abstract

We examine the short-run impact of the two Canterbury earthquakes (4/9/2010 and 22/2/2011) on the New Zealand economy using vector autoregressive models. Maybe surprisingly, we find little evidence of a pronounced impact on the aggregate economy. Our results suggest that the earthquakes reduced consumer price index inflation moderately, and the first earthquake had a small but short-lived, adverse effect on the real gross domestic product growth. At the very worse, it appears that policies (by the government and the Reserve Bank) have been successful in mitigating any serious adverse macroeconomic impact. The more significant impact of the earthquakes is to be found at the regional level.

Keywords:

• Canterbury earthquakes
• short-run
• natural disasters
• macroeconomic variables

JEL codes:

• E27
• Q54

Notes

1. The Tohoku disaster was the costliest disaster in modern history in absolute terms.

2. The 22/2/2011 earthquake was located closer to the city and it occurred at 12.51 pm, around lunchtime on a weekday. The peak ground acceleration was very high since the epicentre ofthe earthquake was very shallow and therefore violent shaking was felt on the surface (CanterburyEarthquakes Royal Commission, 2011).

3. About 40% of this sum was re-insured (mostly in Europe) and the rest will be covered by the EQC savings from previous years and about 1 billion is to be covered by government, as the last insurer (data from a public talk by Ian Simpson, Chief Executive of the New Zealand Earthquake Commission, 1/3/2013).

4. Statistics New Zealand estimated the value for the capital stock that was destroyed at $4.6 billion (Statistics New Zealand, 2012). Insurance payouts are for replacement costs, rather than the value of destroyed capital.

5. Cavallo and Noy (2011) provide context and background to these distinctions.

6. Noy (2009) finds that middle- and low-income countries with a higher literacy rate, better institutions, higher per capita income, higher degree of openness to trade and higher levels of government spending are in a better position to deal with the initial negative shock and prevent further spillovers into the macroeconomy. Loayza, Olaberrria, Rigolini, and Christiaensen (2012) extend this analysis further by distinguishing between different types of natural shocks, and their impact on the agriculture, industry and services sectors.

7. Similarly, the New Zealand Treasury is predicting that the sequence of Canterbury earthquakes in 2010–2011 will have a positive effect on economic activity once rebuilding gets underway (New Zealand Treasury, 2012).

8. CERA's population estimates are about 1% decrease in population in the Canterbury region between early 2010 and early 2013, in comparison to more than 2% increase in New Zealand's population over the same time period (CERA, 2013). Parker and Steenkamp (2012) suggest the region's population may have decreased between 2% and 6% from June 2010 to June 2012.

9. We used GDP data collected using the production-based method following Statistics NZ recommendations (Statistics New Zealand, 2006).

10. In most cases, the AIC selected VAR models with two lags, and we therefore consistently used two lags in our three estimated models.

11. In a few instances, data was only available starting from a later date, in which case we adjusted the baseline period.

12. The adjusted CPI inflation excludes the direct impact of the increase in the rate of GST (from 12.5% to 15%, implemented on 1/10/2010), the excise tax on tobacco (implemented in three steps on 28/4/2010, 1/1/2011 and 1/1/2012), and the incorporation of stationary energy and liquid fuel sectors to the amended Emission Trading Scheme.

13. After the second earthquake, the Reserve Bank of New Zealand lowered the official cash rate (OCR) from 3% to 2.5%. As mentioned in the monetary policy statement, this was done to lessen the economic impact of the earthquake since there was considerable damage done to infrastructure and buildings, as well as disruption to business activity and a likely deterioration in consumer and business confidence (Reserve Bank of New Zealand, 2011).

14. The Financial Statements of the NZ Government are available on an accrual basis. Earthquake-related expenditure is recognized in the June 2011 fiscal year, even though the impact on the government's cash flow could persist for several years.

15. A large number of people have moved to Australia: 30,500 in 2010/2011 compared to 16,700 in 2009/2010 (Department of Labour, 2011, p. vi).

16. In our VAR estimations, we include binary indicators for the two earthquakes and for the GFC (Q3, 2008). We are not interested, however, in the GFC per se, and therefore do not present the relevant impulse response functions.

17. The only important export sector that was clearly hurt by the earthquakes was international tourism. Christchurch was a major tourist destination, and all of the main attractions in the city centre, as well as most hotels, have been destroyed (Parker & Steenkamp, 2012).