End of the golden weather

The New Zealand economy appeared to have hit a sweet spot in the early part of this year, but a number of previously supportive factors have started to turn in recent months. We’re becoming more convinced that the pace of growth has already passed its peak, although the June quarter should mark the low point for GDP growth this year. And with the economy running short of spare capacity, future growth is increasingly likely to be accompanied by higher inflation.

Last week, the June Quarterly Survey of Business Opinion showed a substantial drop in business sentiment compared to March. To put that in context though, the previous reading was the highest in two decades, and even the softer June results were among some of the highest on record. That suggests the economy was still growing at a solid pace over the June quarter, but less than the 1% or so recorded in each of the previous three quarters.

Consequently, we’ve revised down our estimate of June quarter GDP growth from 0.9% to 0.7%. Some of the slowdown during the quarter may prove to be a temporary Easter effect. So we expect growth to be a little stronger over the last two quarters of this year, though still shy of the earlier 1% pace.

We’ve also revised our forecast of Fonterra’s milk price for the current season to $6.40/ kg, a substantial downgrade from our earlier forecast of $7.10/kg. World dairy prices have fallen more than we expected, down 29% at auction since February. What’s more, the exchange rate has failed to act as a buffer in this time – instead of falling, it has continued to trend higher, coming very close to a new record high against the US dollar this week. There’s a high degree of uncertainty around the milk price given that we’re still near the start of the season; our forecast assumes that world dairy prices stabilise over the next few months. We’ll discuss the outlook for dairy in more detail our Fortnightly Agri Update on Wednesday.