Dairy dive to bite, but no recession
THE dairy sector downturn will have a big impact with some heavily indebt farmers likely to be ‘‘decimated’’, but is not expected to push New Zealand into recession, with growth of 2 per cent still expected, economists say.
But it will mean much less investment and spending by farmers and much lower buying power for everyone because of a falling New Zealand dollar – an effective pay cut.
There is also a risk that banks will become more cautious about lending not only to farmers, but other businesses, perhaps hitting the cities a year down the track.
On Friday, Fonterra cut its milk price forecast to $3.85 per kilogram of milk solids, down from $5.25 and at the low end of expectations.
The lowest prices in a decade are expected to wipe about $2.5 billion off the economy, one analyst says. The low payout means many farmers will lose money for the season.
It also means further interest rate cuts by the Reserve Bank are expected in September and again in October. The slump in global dairy prices has seen the New Zealand dollar drop and it is likely to fall further.
On the other hand, world oil prices have slumped in the past year and the costs of fuel this year are expected to be about $1 billion lower than last year, a big saving for consumers, helping to take the edge off the hit to the farm sector.
Leading economist Shamubeel Eaqub, formerly with NZIER, said it would be one of the few years that the dairy farming sector ‘‘as a whole will be making a loss’’.
‘‘This is a very big deal,’’ he said. ‘‘It is going to have an impact.’’
There was ‘‘always a chance’’ that the dairy downturn could lead into a recession, as it came when the Canterbury quake rebuild was peaking.
‘‘We might see a technical recession, but not a sustained downturn. Most of the indicators like business confidence . . . to exports are holding up consistent with growth about 2 per cent. Not fantastic, but pretty good compared with a lot of other countries,’’ Eaqub said.
There was still plenty of headroom for the Reserve Bank to keep cutting official interest after their ‘‘mistake’’ in lifting rates last year.
The central bank was expected to cut rates another 50 basis points and could need to cut even more if there were signs that dairy downturn was spreading around the rest of the economy, Eaqub said.
The low payout would see farmers become ‘‘very cautious’’, even among those without a lot of debt, so investment and spending would be cut back.
But those farmers with high debts would be ‘‘absolutely decimated’’, facing significant negative cashflows. Banks had been careful in the past not to trigger a mass selloff, because that was not good for anyone. But that could only continue for so long.
‘‘If it doesn’t look like cashflows are improving, things get much harder. It is the second fairly tough dairy season and if that is worsened, say, by drought, we might see some serious issues,’’ Eaqub said.
Banks were more cautious on dairy sector lending, but could also rein in corporate and business lending, which could hit spending and investment in the big cities, perhaps a year later.
Bank of New Zealand says the dairy downturn was big enough to slow overall consumer spending growth to ‘‘a virtual crawl’’ when a lot else was suggesting a decent rate of expansion.
BNZ expected the overall economy had peaked and would slow to about 2 per cent.
‘‘It (dairy) affects New Zealand’s income in a big way’’ BNZ senior economist Doug Steel said, with billions of dollars in lower revenue, . ‘‘and all the spending they don’t do as a consequence of that lower revenue’’.
The impact for most city people has come with the lower New Zealand dollar, down from about US85c to US66c in a year, dragged down as dairy prices fell. That currency fall gave a boost to exporters but increased import costs for everyone and it meant buying power was going backwards.
Buying imports online from overseas or in the shops is more expensive than a year ago when the dollar was above US85c.
‘‘Anyone going online to do their shopping overseas lately will see the consequence of (the lower dollar). It is right in your face and highly related to dairy,’’ Steel said.
Infometrics economists said new car prices were down 3 per cent on a year ago in the June quarter, but prices were unlikely to fall further. Car sales growth may soon run out of steam because of lower consumer confidence and higher import costs.
And while petrol prices are down about 7c a litre in the last month, they would be a lot lower if the NZ dollar was still above US85c.
There was a risk a dairy downturn could lead to a recession, and was a big ‘‘income hit’’, BNZ’s Steel said. But on the plus side, farmers had saved about $1.5b of the big payouts seen a year ago. ‘‘So there was some cash in the tank.’’
Meanwhile, HSBC was optimistic about the medium-term outlook for the dairy sector and said prices would rebound. For now, there was a glut, but in time some high-cost production would drop out, supporting prices in future.
Demand from China had been weak in the past year and ‘‘at some point’’ China would return as a big buyer.
In the meantime, lower dairy export earnings would be a big drag on New Zealand’s national income.
Though the economy has slowed recently: ‘‘We don’t anticipate a sharp slowdown in overall growth,’’ HSBC chief economist Paul Bloxham said.
Domestic demand was firm and tourism was ‘‘booming’’. Commercial building work would pick in Canterbury and home building speed up in Auckland.