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Home / Business / Economy

Top economist warns of NZ recession risk

NZ Herald
3 Jul, 2015 02:28 AM3 mins to read

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A leading economist is warning NZ is at risk of going into recession. Photo / File

A leading economist is warning NZ is at risk of going into recession. Photo / File

So much for the rock star economy.

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.

BNZ head of research Stephen Toplis said the biggest shock to New Zealand's economy had been the ongoing demise of the dairy sector.

The price of whole milk powder - which is responsible for about 75 per cent of Fonterra's farmgate milk price - plunged 10.8 per cent to US$2054 a tonne at the latest GlobalDairyTrade auction this week.

The overall index fell 5.9 per cent to record its ninth consecutive decline, driving the New Zealand dollar to a fresh five-year low of US66.59c last night.

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Economists are now picking the Reserve Bank to cut the official cash rate back to 2.5 per cent (from 3.25 per cent 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 $5.20kg 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."

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BNZ is forecasting annual average growth this year of 2.4 per cent, falling to 2.1 per cent 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).

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• A drought hitting dairy production.

• A fall in Christchurch house prices sparking generalised 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.

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