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Liam Dann 's Opinion

Business editor of the NZ Herald

Liam Dann: Mini-boom chance to diversify economy

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High rainfall this summer was enough for a spike in dairy production that flowed on to myriad other sectors - and showed our economy's reliance on the weather. File photo / Mark Mitchell
High rainfall this summer was enough for a spike in dairy production that flowed on to myriad other sectors - and showed our economy's reliance on the weather. File photo / Mark Mitchell

New Zealand is one of the greatest grass-growing nations in the world. That's not a reference to a cultural love for Bob Marley - although apparently we are good at growing that stuff too.

But our ability to naturally and cheaply grow food for cows and sheep is almost unrivalled. It is one of the advantages that underpins our rare status as a first world food-exporting nation.

We hear a lot about Australia being a lucky country because of its mineral wealth. And we also hear about the risks for that economy in relying too heavily on those resources.

In reality New Zealand is not so different. Our primary resource is our climate. It rains a lot and we are good at growing the green stuff.

It sure rained a lot this summer and guess what ... our economy had a mini-boom.

As GDP figures published on Thursday showed, the scale of the dairy industry in New Zealand is such that it is a big contributor to GDP above and beyond pure export receipts.

GDP growth surprised economists by coming in at twice the expected level for the March quarter - it was 1.1 per cent as opposed to expectations of about 0.5.

The figures showed the agriculture sector grew by 2.3 per cent - its biggest gain since 2006. But perhaps even more significant was the boost to the manufacturing sector which rose 1.9 per cent thanks to a 3.2 per cent rise in food processing.

In other words the dairy sector is not just about cows and farmers, it is about turning milk into milk powder in enormous factories all over the country. You can add to that all the extra transport activity involved in moving the product about and plenty of other service sector businesses that feed off the dairy industry.

This month the Ministry of Primary Industries reported that dairy production was up by 10 per cent in 2011. That's partly to do with the rise in cattle numbers but mostly represents some pretty good conditions at the start of the year and exceptional conditions at the end.

That kind of boost will certainly have flowed through to the later part of the latest dairy season which falls in the March quarter. The excellent growing conditions have extended the length of the season for many farmers allowing them to keep milking for longer than usual and produce more.

While global dairy prices fell during the three-month period they remained at historic highs, so export earnings were also good.

The GDP number was a rare piece of economic good news for the Government but it did well to avoid trumpeting it as a sign of some sort of policy success.

Finance Minister Bill English has a farming background (his brother is president of Federated Farmers) and he knows as well as anyone how fickle weather can drive fluctuations in our GDP.

English noted the good news in a circumspect press release on Thursday saying the numbers confirmed "moderate underlying strength in the economy". He also noted "we are likely to see fluctuations in growth from quarter to quarter".

He'll be well aware that we could see the figure slump back quite dramatically in the next quarter.

That doesn't mean Thursday's numbers weren't good news. This is a deep and serious economic downturn and the March quarter has given the economy a shot in the arm.

It may not last but it might provide some momentum and some of the money from the summer boom should still be sloshing around.

So let's not be too gloomy - it's a win and we'll take it.

But let's also not forget that here we are 12 years into the new millennium and still counting our blessings for a good growing season.

The next drought is always just around the corner. In 2008 it was drought that tipped New Zealand into recession, not the global financial crisis. Just like the All Blacks if they rely too heavily on injury-prone stars like Dan Carter we remain highly vulnerable to a climatic event knocking out the economy's top performer. The best time to turn your attention to the next generation of stars is when you have points on the board.

The March quarter GDP growth puts New Zealand's annualised growth near the top of the OECD league but that position will be fleeting and our GDP growth will remain lumpy as long as we rely on the weather.

The Government needs to stay firmly focused on those sectors of the economy that we can boost through good management and good public policy - science and technology, high end manufacturing, design and even tourism.

Not even the agricultural sector can afford to be complacent. Now, when the commodity business is good, is the time to put the foot down on the shift towards smarter, higher value food production and processing.

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- NZ Herald

Liam Dann

Business editor of the NZ Herald

Liam Dann is the Business editor of the New Zealand Herald, overseeing all our business content in print and online. He has been a journalist for 20 years, covering business for the last 14 of them. He has also worked in the banking sector in London and travelled extensively. His passion is for Markets and Economics, because they are the engine of the New Zealand economy.

Read more by Liam Dann

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