The drought afflicting large parts of the North Island is likely to send the agricultural sector into reverse in the first half of the year, BNZ economist Doug Steel says.
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."
2 Comments
Yeah well like its that two cow thing:
We thought we had this:
A NEW ZEALAND CORPORATION
You have two cows.
You sell one and buy a bull.
Your herd multiplies, and the economy grows.
You sell them and retire on the income.
but now its all over the place:
VENTURE CAPITALISM
You have two cows.
You sell three of them to your publicly listed company, using letters of
credit opened by your brother-in-law at the bank, then execute a debt/equity
swap with an associated general offer so that you get all four cows back,
with a tax exemption for five cows.
The milk rights of the six cows are transferred via an intermediary to a
Cayman Island Company secretly owned by the majority shareholder who sells
the rights to all seven cows back to your listed company.
The annual report says the company owns eight cows, with an option on one more.
AN AMERICAN CORPORATION
You have two cows.
You sell one, and force the other to produce the milk of four cows.
Later, you hire a consultant to analyze why the cow has dropped dead.
A FRENCH CORPORATION
You have two cows.
You go on strike, organize a riot, and block the roads, because you want three cows.
AN ITALIAN CORPORATION
You have two cows, but you don’t know where they are.
You decide to have lunch.
A SWISS CORPORATION
You have 5,000 cows. None of them belong to you.
You charge the owners for storing them.
A CHINESE CORPORATION
You have two cows.
You have 300 people milking them.
You claim that you have full employment and high bovine productivity.
You arrest the newsman who reported the real situation.
AN INDIAN CORPORATION
You have two cows.
You worship them.
A BRITISH CORPORATION
You have two cows.
Both are mad.
AN IRAQI CORPORATION
Everyone thinks you have lots of cows.
You tell them that you have none.
Nobody believes you, so they bomb the crap out of you and invade your country.
You still have no cows but at least you are now a Democracy.
AN AUSTRALIAN CORPORATION
You have two cows.
Business seems pretty good.
You close the office and go for a few beers to celebrate.
A IRISH CORPORATION
You have two cows.
The one on the left looks very attractive.
A GREEK CORPORATION
You have two cows borrowed from French and German banks.
You eat both of them.
The banks call to collect their milk, but you cannot deliver so you call the IMF.
The IMF loans you two cows.
You eat both of them.
The banks and the IMF call to collect their cows/milk.
You are out getting a haircut…
A JAPANENSE CORPORATION
You have two cows.
You redesign them so they are one tenth the size amd produce twenty times the milk.
You then produce clever cow cartoon images called Cowkimon and market them world wide
A GERMAN CORPORATION
You have two cows.You re-engineer them so they live for a hundred years, eat once a month and milk themselves
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