ANZ economists say their preliminary estimate last week that the drought might knock 0.5 percent off this year's GDP is now looking light - with the economic consequences growing at an exponential rate.
"Such a dynamic will lean heavily against a picture that’s otherwise suggesting economic improvement," senior economist Mark Smith says in ANZ's weekly "market focus".
"Drought conditions continue to worsen – and the economic consequences are intensifying," Smith says.
Northland was the first region to be officially declared in drought nearly two weeks ago and it was joined last week by South Auckland (south of the Harbour Bridge), Waikato including Taupo, Bay of Plenty, Coromandel and Hawke's Bay.
"The speed at which the country is drying up suggests at least a 0.5% hit to GDP 2013 and we think the downstream consequences are now growing at an exponential rate," Smith says.
He says that ANZ analysis of the production impact of past drought episodes suggested a 0.5% to 1.0% hit to production-based GDP.
"One of the takeouts was that drought impacts tend to have a long-lasting impact on production, which eventually permeates throughout the wider economy."
Smith says there is no denying that there are signs of more general improvement (outside of the labour market at least) in the economy and he says ANZ economists were encouraged last week to note the pick-up in tax revenue as indicated in the seven-month government financial statements.
"Such real-time bellwethers are significant. People do not generally pay tax without a good reason," he says.
"We respect the improvement but still harbour some concerns over what growth could look like by mid-year. Mother Nature is a big swing variable for GDP; higher KiwiSaver contributions will bite into discretionary spending; the NZD seems stuck in the stratosphere; and we’d expect the threat of regulation to act as a suppressant to housing. A lot depends on the construction sector filling these voids."
Smith says such dynamics complicate the task facing the Reserve Bank on Thursday when it issues its latest Monetary Policy Statement and decides whether to make any adjustments to the Official Cash Rate.
The issues facing the central bank are "a well-shaken cocktail", smith says.
"The RBNZ face a tricky balancing act and we will be noting with great interest how the RBNZ characterise housing market strength, and how the worsening drought conditions have affected the outlook."
Smith says the ANZ's loan approvals indicator suggests a February pullback in housing sales volumes is likely.
"We note figures pointing to a February lift in properties on the market, but there is some way to go, with the nationwide inventory of saleable properties 5% lower than 12 months ago, with a larger reduction in inventory levels in Auckland and Canterbury. No wonder prices are continuing to firm."
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