He says the bank expects that in the fourth quarter of 2012 (official figures for which are not released till March 21) the agricultural sector the agricultural sector will have expanded by 3%.
But then the expectation is for a 4% drop in agricultural GDP the first quarter of this year followed by a further 2% fall in the second quarter.
"While we have a lot of faith in the general sentiment these figures convey, we suggest taking the actual point estimates with a grain of salt. Precision is as difficult as ever given the vagaries of how agriculture GDP is calculated, measured and ultimately revised," Steel says.
The BNZ has now trimmed its overall GDP forecast for the first quarter to 0.6% from 0.7% and its second quarter forecast to 0.5% from 0.6%. It's projecting overall growth for the whole of 2013 of around 3%.
"So we find ourselves in an uncomfortable position of forecasting a mild strengthening in economic growth this year, while staring at some large risks on both sides. If nothing else, the national average growth rate will be made up of some very different outcomes across sectors and regions," Steel says.
He expects national milk production to post some "large negative growth rates" in February, March and April this year compared to last year's comparatives, even though the national season as a whole might still be up around 2% on last season following a very strong first half of the season.
"Profitability is being particularly hard hit, as the production decline coincides with rising costs. For sheep farmers, this comes on top of lamb and wool prices both declining by a third over the past year. This is important at the macroeconomic level as Q1 GDP is shaping up to be a strong one.
"Part of the Q1 strength can be attributed to agriculture, but this should not be extrapolated into early 2013. Indeed, we maintain our view that agriculture GDP will contract in H 2013, in fact a little more so than we previously had expected. We have shaved down our overall GDP forecasts reflecting the minor adjustment to the agriculture sector, but more so on account of the second round impacts of the drought on the economy. This includes a likely reduction in value-added from less hydro electricity generation ahead and a bigger reduction in food processing ahead."
Steel says the overall effects on the economy of a drought can be large, with estimates that the prolonged and widespread 2007-09 drought knocked overall GDP down by around 1.5%, with about 1% coming from the direct hit to agriculture and the remainder the flow-on effects from the likes of farmers curbing discretionary spending.
"The impact could easily be 1% of GDP this time around. Surely this would scuttle any thoughts of GDP strengthening at all this year. Ordinarily it would. It still might. In the least it will restrict overall growth to less than it otherwise would have been."
Steel say in the past droughts have often coincided with negative events like the Asian Financial Crisis (1997/98) and the Global Financial Crisis (from 2007/08), making it difficult to disentangle the individual effects on overall economic activity.
"This time around the world is still fragile but showing no signs of the crisis extremes of a few years ago. Moreover, we have a major economic boost coming in the form of the Christchurch rebuild along with a more general pickup in construction from a low base."
Steel says lit needs to be born in mind looking at the economy as a whole, that this strong construction outlook has been affirmed again by recent indicators.
"More construction activity will give a significant boost to a decent chunk (but not all) of the domestic non-food manufacturing sector.
"Indeed, yesterday’s solid 1.8% gain in Q4 real building activity fits with our view that non-manufacturing GDP will show decent increases over coming quarters, assuming the usual lags. Indeed, these decent increases in construction and non-food manufacturing will be needed to offset the negative effects in agriculture, electricity generation valued-added, and the food processing part of the manufacturing sector that will also come under drought related pressure (dairy processing initially and meat processing once the currently elevated animal kill runs its course). Non-food manufacturing will also get a boost later in the year when Methanex expands methanol production."