Inflationary risks from Cyclone Gabrielle’s misery

The economic cost of the cyclone is, as yet, impossible to quantify. But the sheer number of people and the area impacted point to a significant effect on economic activity. First there’s the near-term disruption and destruction (for example, of agricultural production) and, in the longer term, the repair and rebuild that will happen over 2023 (and beyond).

“The impacts of the cyclone point to clear upside risks to inflation. Construction costs, rents, insurance, furniture, car and food prices (among other factors) could all face further upward pressure.”

The impacts of the cyclone point to clear upside risks to inflation. Construction costs, rents, insurance, furniture, car and food prices (among other factors) could all face further upward pressure due to the cyclone. 

There’s not much monetary policy can do to help those affected in an event like this – the response is best left to fiscal policy, which is faster acting and can be targeted where it’s needed most. The best thing monetary policy can do is get the economy on an even keel and prevent inflation becoming self-perpetuating. 

Monetary policy might need to respond to the extra inflation pressure the cyclone will bring or it might not, depending on what else is going on.  That meant until the picture becomes clearer the most sensible thing for the RBNZ to do at its November Monetary Policy Statement was to stay the course and deliver the 50 basis point hike analysts and the markets were expecting. Markets barely budged in response, which was exactly what the RBNZ was trying to achieve. 

Growth likely to take a(nother) hit in the near term 

It’s far too early to have an accurate sense of the overall dollar cost associated with the Auckland floods and Cyclone Gabrielle. But it’s clear that destruction has been widespread, with houses damaged or destroyed, businesses flooded, bridges gone, roads covered or wiped out by slips, crops and land destroyed, electricity out, and logging operations halted. All these factors will weigh on economic activity in the March quarter, posing downside risk to our current forecast GDP expanded 0.1 per cent quarter on quarter. GDP could easily shrink in Q1 and activity in Q2 is also likely to be affected too (Q2 starts April 1). 

Lower GDP would simply mean we didn’t produce as much output in Q1 as we did in Q4. A lot of that lost production is indeed lost, as opposed to deferred (for example destroyed crops). But the much costlier impact of the cyclone is it has reduced the capital stock (that is, the tools we use to generate output/GDP). This ranges from lost and damaged equipment (farm machinery, buildings etc) to damaged roads and bridges, drowned substations and other damaged infrastructure, and even topsoil.

Replacing or repairing homes, businesses, and infrastructure will, from a national accounts perspective, likely boost GDP growth over 2023 and beyond. But given much of this activity will simply be to replace or repair what was damaged and get us back to square one, it’s hardly ‘quality’ GDP growth, nor what we’d prefer to be spending our scarce resources on. It will also be massively expensive, and likely boost construction costs and broader labour costs, given many key sectors (including construction) have been struggling to keep up with demand over the past year or so.

While the labour market is starting to turn (job ads are lower, for example), it is still very tight. And it can be difficult to persuade workers to change regions. The required rebuild in Hawke’s Bay is far greater than the local construction sector resources can hope to handle in a reasonable time frame.

Stylised impact of recent weather events on GPD growth