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Sept. 8 (BusinessDesk) – Let’s get one thing straight. Earthquakes are not good for the economy.


By Pattrick Smellie

Sept. 8 (BusinessDesk) – Let’s get one thing straight. Earthquakes are not good for the economy.

There’s been some feverish talk about the damage to Christchurch being some kind of god-send for the construction industry, especially after last week’s prediction of a collapse in activity in that sector, with 20,000 to 30,000 jobs at risk.

But try painting the destruction as good news for someone whose house is threatened with collapse on the next big after-shock. Don’t expect a sympathetic reaction.

Yes, it’s true that there’s suddenly a lot of work in Christchurch for anyone skilled in wielding first a sledgehammer and then a normal hammer.

But an earthquake is only good for the economy in the same way that wars are: once everything’s been wrecked, it needs to be rebuilt.

But what do you have once you’ve rebuilt? You have what you had before, only newer.

Admittedly, there will be an opportunity to throw some Batts in the ceilings of elderly homes that are temporarily unroofed, and some property owners will take the opportunity to renovate earlier than they might have. Nationally, retailers of baked beans, torch batteries and big bottles of water will probably report a stronger month than usual.

But there is still virtually no productivity gain, no new long-term economic activity generated, and no addition to the national balance sheet from reconstruction in the aftermath of a disaster.

That’s why insurance stocks fell on Monday morning, while shares of companies like Fletcher Building and Steel and Tube took a jump up. The insurance bucket will tip some funds into the construction bucket, but it’s still a zero sum game.

Likewise, the Earthquake Commission and the government will spend money to put things right, but every cent of that comes off the asset side of the Crown accounts. As Prime Minister John Key made clear this week, the government may well have to lift its self-imposed cap on new spending to meet the emergency demand.

Thankfully, there is headroom to do this. As Standard & Poor’s noted when maintaining the country’s current credit ratings earlier this week: “There is likely to be a negative impact on government finances, but we believe that the Crown’s very low debt burden … provides it with some room to absorb increased spending on reconstruction.”

Someone should tuck that “very low debt burden” comment away for a rainy day, since fears about the government debt picture were enough to have Ministers scurrying to international financial centres just 18 months ago, on the fear of a downgrade.

In a sense, the earthquake spend is the physical equivalent of the South Canterbury Finance bail-out: it’s a good thing we were prepared for it, but it’s still a damned nuisance. It will not only siphon off capital and investment into repairing the damage, but it will also sap government focus from its wider economic policy challenges.

The clearest proof of that is that Key is cancelling important international travel to deal with the issues and the Minister of Economic Development Gerry Brownlee is on point duty as the Minister of Shaky Buildings in Christchurch for the foreseeable future.

It’s hard to see a lot of focus going into the Economic Growth Agenda while the earth’s still moving down south and the government remains in crisis management mode.

Of course, handling a crisis well can be a powerful political fillip – Christchurch mayor Bob Parker’s chances of re-election look only to have been improved by the earthquake.But any sense of dithering, inaction or inadequacy of response will be leapt on by news media who by now are running out of ruined shops to stand in front of and are looking for fresh angles.

Hence Key’s about-face on going to London this weekend, a decision almost certainly driven as much by signs that the Press Gallery scented a classic beat-up in which Key staying at the Queen’s private residence could be portrayed as insensitive junketing.

Meanwhile, banks, power companies and unpopular businesses like Hong Kong-backed would-be buyers of the Crafar farms, Natural Dairy New Zealand, have fallen over themselves to be generous.

Where Fonterra gave $1 million in relief, NDNZ – a much smaller enterprise – pledged $250,000. The million dollar pledge from Contact Energy, whose reputation has suffered ever since blundering into an increase in both its tariffs and its directors’ fee pool almost two years ago, is the largest single donation it has ever made, in a market where competition for customers has been particularly fierce.

Bank chief executives, normally unavailable and remote, have been offered on a plate to reporters to discuss their quake-sponsored benevolence.

Not that any of this is bad. Canterbury has a daunting clean-up on its hands, so assistance is welcome, irrespective of the wider agendas that may fuel it.

Nor is the news from the earthquake itself all bad. It’s not a complete accident that nobody died in Saturday morning’s big shake. It must be, in part, a testament both to the value of well-enforced building codes and to the country’s specialism in earthquake engineering.

Those investments, made in good times, have borne fruit in this catastrophe. While the cost of the clean-up may hit $2 billion and do nothing in the long run for economic activity, it’s also true that the cost could have been so much higher.


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    […] Since my piece the other day, respected business journo Patrick Smellie has written an article dismissing the suggestion that the earthquake could be an economic boon, and Treasury has put […]