North Island Floods and Cyclone Will Affect the Construction Downturn More Than The Economy

There is always concern for the long term economic outlook of cities and countries when hit by natural disasters, but overall New Zealand is looking pretty good to recover well in the long run.

Despite keeping this positive attitude towards New Zealand’s economic outlook in mind, it cannot be denied that with repair work and clean up taking priority, it is going to be the building and construction industry that is affected the most.

With delays being the major concern –in terms of repairs and clean up being the priority receivers of labour and supplies, the hard fact of people and properties personally affected by the floods, and the impact on transport infrastructure– the effect of the disaster is likely to be on the cost of supplies.

Wespac acting chieve economist Michael Gordon expressed these views in a recent interview, "Based on what has been reported so far, we estimate that it could be in the range of $500m, and potentially higher.”

The 2023 floods are already on track to being the most expensive weather event in New Zealand by a significant amount, though it is still well short of the $40 billion Canterbury earthquakes. For perspective, the 2016 Kaikoura earthquake cost around $2 billion in repairs.

Gordon went on to say that while these numbers are without a doubt large, the nationwide building activity was currently running at over $50 billion.

Keeping construction costs elevated with an increased demand for an already limited supply, the Auckland floods have hit at a particularly bad time when the industry was already stretched to capacity. Gordon contrasted this with the timing of the Canterbury quakes which occurred during an industry depression. In cold, hard, practical terms this meant that the construction industry was able to boom in the repair era after the disaster that took so much from New Zealanders.

This time, however, with the post-pandemic push for housing and infrastructure already keeping the industry busy, “we suspect that flood recovery work won't end up being much of a boost to building activity - rather, we may see some projects delayed or shelved while the repair work takes priority."

Gordon also stated that there were signs of the construction cost inflation cooling down at the end of 2022, but that thanks to these delays and increased demand for supplies that cool down may take longer to overcome.

This also has a major effect on cost of living inflation factors such as direct food costs.

"Vegetable growers were already contending with poor growing conditions that saw prices rise by 23 per cent over 2022, and this year's flooding has caused major damage to some crops in the Auckland region."

Though Gordon does concede that these effects should only be short lived and not contribute to a sustained inflation effect that could trigger a response from the central bank, he called for patience as the inflation data over the coming months feeds in.

Reports from Kiwibank seem to agree, stating recently that, “he impact of the floods a fortnight ago will be long-lasting, the rebuild will likely be slow because it comes at a time when industries like the construction sector, are already running at full capacity.”

We saw a good level of normalization in terms of supply costs as we recovered from the pandemic impact on supply chain, but with another impactful event jumping in before recovery could ready take place there is concern that flood repairs could significantly exacerbate the shortages.

Kiwibank economist reports recently stated that “as a key driver of domestic inflation, the rebuild frustrates the outlook,” and noted that the residential construction sector was already under pressure and will now be even more so.

Though they stand by the statement that the Auckland floods will have lasting economic consequences, that it was unlikely to have a major effect on the countries’ monetary policy.

"We believe downward momentum in overall inflation is building and forward-looking indicators suggest economic activity is set to slow. We still see the RBNZ increasing the cash rate by 50bps later this month."

In another statement, ASB economists downgraded their forecast.

ASB chief economist Nick Tuffey added, "the labour market data was the last straw tipping us back to picking a 50bp OCR increase, instead of 75bp, at the upcoming February Monetary Policy Statement… after this month, we still expect a 50bp increase in April that takes the OCR to a peak of 5.25 per cent."