ANZ economists say the big dry could have an NZ$500 million hit to the economy in the first half of the year; trim this year's economic growth by as much as 0.5%

The current spate of dry weather is likely to "significantly weigh" on producer incomes and primary sector production, ANZ economists say.

"Our estimates suggest an NZ$150 million hit to pastoral incomes in the first half of 2013, with the wider impact in the region of NZ$500m," they say in the ANZ's weekly "Market Focus".

Following the declaration of drought conditions in Northland last week, the bank economists are starting to sharpen their pencils on the possible negatives from the long dry spell. Westpac economists said last Friday the weather may take some gloss off what is otherwise shaping as strong growth during 2013.

And now the ANZ economists say they can can envisage "a 0.5% hit" to the level of GDP by late 2013.

"The impacts of prolonged period of dry weather are also likely to be long lasting, with agricultural and primary manufacturing production unlikely to recover to predrought peaks for at least 24 months. A long and difficult road lies ahead," they say.

The economists say their numbers are only preliminary, and much could change with some decent rainfall.

"Nevertheless, they [the numbers] illustrate how serious a prolonged dry period would be for livestock producers incomes and the New Zealand economy more generally."

The economists say the current dry period is not as bad as that seen in 2007-08 and a higher base to dairy production from the prior season will help protect against the impact.

"The good news is that drought conditions are a cyclical influence that will fade, and bumper conditions in prior years mean the primary impact is somewhat akin to production normalisation. New Zealand has dealt with droughts before and will no doubt have to time and time again. The bad news is that the correlation between drought conditions and recessions across the economy is somewhat scary (1998, 2008 – though these were both influenced by unfortunate correlations with global financial crises), and the consequences can be felt for 12-24 months."

The economists say at the moment they are not altering their core economic assessment, which is already for "bumpy, 'grumpy' growth" continuing over the next 12 months.

"It just got bumpier. There will be will be counteracting forces, resulting in considerable volatility given the myriad of shocks hitting the economy. These have both demand and supply side angles. Even if we just consider the manufacturing sector, the drought hit to food production will be somewhat offset by the looming boost to construction in Canterbury and elsewhere – but exacerbated by the high NZD. And in the bigger economic picture, fiscal austerity will start to really hurt this year, and the labour market remains tepid. Near record-low interest rates are providing a valuable growth offset, but have the potential to cause financial stability issues down the track."