Economists expect big dry to have the same economic impact as coronavirus

by Roxanne Libatique19 Feb 2020

BNZ economists have warned that the worsening drought in New Zealand could have much impact on the economy as the coronavirus outbreak.

The economists said in BNZ’s weekly Market Outlook that the drought might result in increased beef and sheep kill and reduced supply of dairy products. It could also slash 0.5 to 1.0% from the GDP.

“We are concerned that folks are overlooking an economic driver in New Zealand that could, conceivably, have [at] least as much adverse impact on activity – namely, the deepening drought,” Stephen Toplis, head of research at BNZ, said – as reported by Interest.co.nz.

“We have already made adjustments to our outlook, but we have been very conservative so far. The risks are clearly for a bigger effect than we are assuming. Similarly, we have been conservative in our coronavirus assumptions so far.”

Read more: ASB economists expect OCR to remain unchanged until 2022

Toplis warned that the economy could become vulnerable to a technical recession in the first two quarters of 2020 if the impacts of the big dry and the outbreak would approach the upper end of the BNZ economists’ range of estimated impacts.

“From the market’s perspective, even our ‘optimistic’ scenario leaves us with a GDP growth profile that, in the short term, is much weaker than the RBNZ’s,” he said. “Indeed, we were surprised that the Reserve Bank barely mentioned the drought in its forecasts. The word ‘dry’ appears once in the latest [RBNZ Monetary Policy Statement], ‘drought’ once (but in deference to other countries), and ‘coronavirus’ about 30 times.”

“Moreover, if both the coronavirus and drought prove transitory, then there is minimal cause for RBNZ action. And, to cap things off, we are still expecting, but have not built into our forecasts, significant further fiscal stimulus, which will probably be announced at the May Budget.”

The BNZ economists predicted a 50/50 chance that the central bank will slash the official cash rate (OCR) this year, although they still wouldn’t consider it as their central view.

“We reiterate that a recession is not our central forecast, but it is a [genuine] risk, and we can’t stress enough that the drought may well, eventually, prove to be as important as the coronavirus. And we are concerned that it is largely overlooked in [many commentaries],” Toplis concluded.

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