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OCR cut set to trigger economic growth - 01 March 2012

The horrific earthquake in Christchurch on 22 February triggered a 0.5% OCR cut that was justified even before the quake. This has added some much needed stimulus to economic growth outside of Christchurch, while more cuts may be justified.

The 22 February Christchurch earthquake was horrific, but it had a silver lining because of the 0.5% OCR cut delivered by the RBNZ on 10 March. This will set in play moderately positive economic multiplier effects that will start in the existing housing market in a few months’ time and filter around the economy over the next year.

The OCR cut was partly because of the 22 February earthquake. But also because the economy was in a worse shape than the RBNZ expected prior to the quake, as I suggested would be the case in the last commentary.

Falling residential building (see the chart), falling house prices and the surge in petrol prices mean near-term economic growth prospects are still a bit worse than the RBNZ predicted in March. This means further OCR cuts are possible, but the RBNZ may decide to overlook the weakness.

The 22 February earthquake super-sized the reconstruction job to $20b or more to be spread over the next 4-5 years (i.e. 10% or more of annual national economic activity). Provided there are no further major quakes, economic growth could be in the ballpark of the RBNZ’s prediction of 5.4% in 2012.

If the reconstruction job runs to schedule the RBNZ plans to start hiking the OCR in the March quarter of 2012. Unfortunately, this means that the rest of the country faces the risk of a housing market downturn in 2012 that will set in play negative economic multipliers.

The economic forecasters are lining up to predict when the first OCR hike will be delivered. However, if near-term economic growth turns out to be weaker than the RBNZ is predicting it should mean that OCR hikes are delayed even if it doesn’t encourage the RBNZ to deliver more, much needed stimulus to economic growth outside of Christchurch. Written by Rodney Dickens. Visit www.sra.co.nz to learn about SRA Ltd’s services.

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