World Economy

NZ Warned of Recession Risk

NZ Warned of Recession RiskNZ Warned of Recession Risk

As dairy prices continue to slump and business confidence tapers off, a leading economist is warning that a “scenario where a recession becomes imminent” isn’t difficult to imagine.

Bank of New Zealand head of research Stephen Toplis said the biggest shock to New Zealand’s economy had been the ongoing demise of the dairy sector, NewsNow reported.

The price of whole milk powder–which is responsible for about 75% of Fonterra’s farmgate milk price–plunged 10.8% to $2,054 a ton at the latest GlobalDairyTrade auction this week.

The overall index fell 5.9% to record its ninth consecutive decline, driving the New Zealand dollar to a fresh five-year low of 66.59 cents last night.

Economists are now picking the Reserve Bank to cut the official cash rate back to 2.5% (from 3.25% currently) in a complete reversal of a rate tightening cycle that began in early 2014.

BNZ this week lowered its 2015/16 milk price forecast to $5.20/kg from $5.70 previously.

“In part, the demise of dairy will be having an impact on economy-wide confidence, such as reflected in the recently released ANZ [business confidence] survey,” Toplis said. “In turn these confidence readings are also useful in predicting future GDP [gross domestic product] growth. Unfortunately, the trend in confidence is down.”

 Growth Forecase

BNZ is forecasting annual average growth this year of 2.45, falling to 2.1% over 2016 and 2017. “That said, the balance of risks around our forecast is becoming more skewed to the downside,” Toplis said. “Indeed, so much so that it is not hard to envisage a scenario where a recession becomes imminent.”

He said a recession could be prompted by the following potential factors:

* A continuation of the dairy price decline (which, Toplis said, was quite plausible).

* A drought hitting dairy production.

* A fall in Christchurch house prices sparking generalized uncertainty in the wider housing market (there was already some evidence of this, he said).

* A drop in investment activity and a weakening economy resulting in lower net migration inflows.

While not BNZ’s central scenario, Toplis said it was easy to see such a series of events tipping the economic balance.

“And we haven’t even talked about the possibility of an adverse global economic shock such as the potential for flow-on impacts of a Greek implosion; a financial crisis in China [and] soaring global interest rates as the [US] Federal Reserve begins to tighten ...”

The possibility of inflation rising on the back of a falling kiwi dollar, combined with the risk of economic growth falling to zero, meant the Reserve Bank “must surely have a fun time ahead of it”, Toplis said.