Paul Bloxham, the economist who first said New Zealand's economy had achieved "rock star" status, has conceded the sharp decline in dairy prices over the last six months has clouded the outlook somewhat.

Dairy prices are 40 per cent below their February peak and are now a touch below their post-2000 average. Earlier this month, Fonterra cut its forecast 2014/15 farmgate milk price forecast to $6.00 a kg of milksolids from previous forecast of $7.00 a kg, which Bloxham said would be a significant drag on New Zealand's economic growth if it came to pass.

"Dairy prices have fallen sharply in recent months, taking some of the shine off New Zealand's strong growth story," Bloxham, who is HSBCs chief economist for Australia and New Zealand, said in a commentary.

"The dairy price fall has been dramatic and is a timely reminder of the volatile forces that large commodity producers can face and need to manage," he said.


"Nonetheless, we remain optimistic about New Zealand's overall growth prospects, as dairy is only one part of the strong growth story," he said.

In January, Bloxham said New Zealand's growth was set to outpace most of its developed country peers. "We think New Zealand will be the rock star economy of 2014," Bloxham told CNBC.

"Growth is going to pick up pretty solidly this year."

HSBC then forecast the economy would grow 3.4 per cent in 2014, the fastest pace since 2007 and well above trend growth of 2.5 per cent.

Latest official data from Statistics NZ showed the economy grew by 3.3 per cent in the year to March.

Bloxham said in today's commentary that growth was still expected to be supported by the substantial and on-going post-earthquake rebuild in Canterbury, a strong upswing in residential construction in Auckland, and rapid net inward migration.

Consumer and business confidence remained at levels consistent with above-trend growth in 2014, he said.

He said it appeared that the fall in dairy prices largely reflected a cycle in Chinese dairy inventories.


Available trade data suggest there was a substantial rise in Chinese dairy imports in late 2013, which has largely retraced in recent months.

Dairy imports had ramped up well ahead of previous trends, suggesting that significant inventories were likely to have been accumulated, which are now being run down.

At the same time, however, near-term supply is set to continue to be supported by better weather in New Zealand and Europe.

In 2015, the removal of European milk quotas could also see an increase in the supply of traded dairy products.

Dairy prices should stabilise in coming quarters, although they seem unlikely to return to their recent peaks in the near term, Bloxham said.

Elsewhere in his commentary, Bloxham said further declines in the value of the New Zealand dollar may provide a buffer. "If the economic damage were to start looking severe and sustained, then historical relationships would suggest that the currency would most likely decline," he said.