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Quake hits fragile New Zealand economy

By Kevin Voigt, CNN
  • The New Zealand dollar dropped 2% in value hours after the quake
  • Comes as the area still recovering from $3 billion quake in September

(CNN) -- As rescue crews continued to search through the rubble for survivors of the deadly Christchurch earthquake, Tuesday's temblor already has shaken confidence in New Zealand's fragile economy.

The New Zealand dollar, known as the kiwi, dropped about 2% in trading in the hours following the quake, which struck in the early afternoon in the country's financial center and second largest city. The earthquake comes just five months after a nighttime earthquake hit the city, causing $3 billion damage to the area but no deaths. Tuesday's quake was centered closer to the city and shallower than the September quake, causing more damage and deaths during the busy lunchtime hour when it struck.

"Whatever rebuilding that was going to occur [after the September quake] was only just getting started, so you have to presume that process has to start all over again," said Michael Turner, a strategist at RBC Capital Markets in Sydney.

Check out CNN's hi-res image gallery of the earthquake

New Zealand's economy was already limping after credit ratings agencies put the government on negative watch late last year due to growing debt. New Zealand was hit hard by the financial crisis with high levels of government and household debt. Government leaders have promised an austere budget and the sale of state assets to return the nation's budget to a surplus by 2015.

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Citibank Group had forecast that the Reserve Bank of New Zealand would increase interest rates this year, but Citibank economist Akash B. Reddy believes the new earthquake makes any interest rate hike unlikely until the latter half of 2012. "We may even see an interest rate cut," Reddy said.

Economists predict that the economic impact of disasters such as Christchurch quake or the floods that devastated areas of Australia are short-term -- in the long run, economies bounce back and beyond due to added investment and jobs created in the rebuilt.

"But the big question is, how long will it last?" Reddy said. "The medium term gains tend to be more than the short-term loss, but the short-term loss is much more damaging to confidence ... along with other factors, there is potential risk of a negative feedback loop on the economy."

And any economic upswing from a rebuild cannot account for the loss of life, personal property and impact of seeing iconic local structures like Christchurch Cathedral left in ruins, analysts say.

"It's a fairly big hit to consumer and business confidence," Turner said. The Christchurch area makes up about 10 to 15% of the national economy "and that's going to shut down for a few weeks," Turner said.

Coming on the heels of September's earthquake, "I think you'll be seeing a lot of people collecting their insurance money and deciding to relocate instead of rebuild, especially if you've been dealing with aftershocks [in Christchurch] for six months -- and now this," Turner said.