Cyclone delivers differing short and medium-term impact 

[As published in March/April BayBuzz magazine.]

The physical and psychological impacts of Cyclone Gabrielle have been devastating, particularly for the worst affected regions, Tairāwhiti and Hawke’s Bay. The cyclone has caused widespread damage to homes, businesses, communities, horticulture, agriculture and public infrastructure such as roads and bridges. The full extent of the damage has yet to be estimated, but reports suggest costs could run into the tens-of-billions of dollars.

There are likely to be differing short-term and medium-term impacts from the damage. In the short-term, food production for both domestic and export markets is likely to be negatively affected.

The cyclone comes soon after the earlier Auckland and Waikato floods that had a damaging impact on crops such as onions and potatoes. While some flood-impaired production for export may be diverted to the domestic market, the net effect is likely to be near-term fresh food shortages, particularly for fresh fruit and vegetables, and associated price rises for affected produce.

Disruption to transport and warehousing facilities are also likely to have a short-term impact on freight logistics, which could cause near-term delays and shortages for consumer and business goods. Freight transport dislocation could also hinder some export goods reaching domestic production facilities and ports. This is especially likely to be a problem for dairy, horticultural and forestry exports from the hard-hit regions of Northland, Tairāwhiti and Hawke’s Bay.

Counteracting these short-term negative influences on economic activity to some extent will likely be an increase in consumer spending (such as household furniture, furnishings, appliances, cars etc) as people seek to replace flood damaged items. Whilst consumption of other goods and services (such as travel, accommodation, eating out, etc) is likely to have been depressed during the cyclone and possibly immediately afterwards, evidence from flood experiences overseas suggest that consumption tends to bounce back within a relatively short period.

In the medium-term, residential and civil construction activity is likely to be stronger than it would otherwise have been as damaged houses and infrastructure are rebuilt and repaired. After the 2011 Canterbury Earthquake, rebuilding was staggered over several years due to delayed insurance assessments and capacity constraints in the building sector. 

Although the magnitude of rebuild activity due to cyclone damage may not be as large as the Canterbury Earthquake rebuild, there are likely to be similar time lags for the start of construction due to the complexities of insurance assessments and ongoing capacity constraints in the construction sector. There is likely to be a significant boost to infrastructure and civil construction due to significant damage to the roading network across the upper North Island.

In New Zealand’s current situation,  it is unlikely horticultural and agricultural production losses resulting from Cyclone Gabrielle will be recouped. In addition, it could take some time to clear debris and mud from productive farmland. This will be a particularly hard time for the primary sector in the Tairāwhiti and Hawke’s Bay regions.

Financial impacts

In the near-term, the floods will boost the prices of some fresh fruits and vegetables at a time when produce prices have already risen substantially due to previous climatic events and rising input costs. Food price increases are already running at an annual rate of 10.3%, with fruit and vegetable prices up 16% from a year ago. 

The impact on fruit and vegetable prices from the cyclone should be relatively temporary until alternative sources of supply (including imports) become available. However, there may be a lingering effect on fruit and vegetable prices to the extent that there are planting delays due to waterlogged soil. It is unclear at this stage the extent to which stock has been lost due to the floods. At the least it is likely there will be difficulties transporting livestock for a time, which may increase prices for a period.

A reduction in habitable houses in the worst affected regions is likely to lead to rises in residential rents and cause house prices to be higher than otherwise in those areas. After the Canterbury Earthquake, annual rental inflation in the region peaked at close to 12%, which was substantially higher than the national average. 

Recent evidence suggests building material costs have started to ease up as building demand eases and supply conditions have improved. However, increased construction activity caused by rebuilding and repairs may keep building costs higher as increased construction activity puts upward pressure on building material prices and builders’ wages across the country. This may be a more slow-burning issue, the magnitude of which may depend on the extent to which construction activity is subdued over the coming 12-18 months by higher mortgage interest rates, falling house prices and previous building cost rises.

In normal circumstances, the Reserve Bank would likely look through the short-term boost to prices caused by events such as Cyclone Gabrielle. However, the current high starting point for inflation and the succession of shocks to food supply – elevating food prices – may be fixing people’s expectations of future high inflation. This increases the risk of persistently higher future inflation as workers and businesses build higher inflation expectations into their wage demands and price setting.

The Reserve Bank signalled at its February monetary policy meeting that the effects of Cyclone Gabrielle are unlikely to influence monetary policy in the immediate future, although it acknowledges the economic outlook is now more uncertain. 

One factor that may further mitigate the risk of a higher OCR going forward, is the possibility large reinsurance inflows sourced from offshore could boost the value of the New Zealand dollar. This was the case in the wake of the 2011 Canterbury Earthquake, when $21 billion of reinsurance inflows had a material influence in pushing up our currency. A stronger New Zealand dollar could help subdue the New Zealand dollar cost of imported goods, thus helping the Reserve Bank’s quest to quell future inflation.

The shattering effects of Cyclone Gabrielle on the people, communities, environment and economies of Tairāwhiti and Hawke’s Bay will take time to heal. However, as the response to the Canterbury Earthquake has shown, communities can be rebuilt with more resilience. After the initial effects pass, the Tairāwhiti and Hawke’s Bay economies will emerge stronger. 

John Carran is Director, Investment Strategist and Economist, Wealth Research at Jarden. The information and commentary in this article are provided for general information purposes only. It is not to be relied upon as a basis for making any investment decision. Please seek specific investment advice before making any investment decision or taking any action. Jarden Securities Limited is an NZX Firm.

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