When Statistics New Zealand released its Q3 national accounts in December, it revealed that real gross national disposable income (RGNDI), which measures the real purchasing power of New Zealand’s disposable income, rose by only 0.3% over the quarter and by 1.4% over the year due to the falling terms-of-trade (read dairy prices):
Given New Zealand’s population grew by 2.0% in the year to September 2015, this meant that RGNDI actually fell on a per capita basis over the year.
Today, ANZ slashed its milk price forecast and warned New Zealand’s dairy farmers that they would have to wait until 2017-18 for their cash flows to turn positive. It also warned that falling dairy prices could wipe up to 3 percentage points off GDP over two years. From Interest.co.nz:
Advertisement
Price action is poor and European supply dynamics are very bearish at present. There simply appears too much supply for the market to handle despite some encouraging demand signals and the likes of China’s import requirements having improved.
Two important structural shifts in the form of increased European supply and a lower cost of production are dominating. Both these factors are expected to continue to suppress prices and delay expectations for a rebound.
USD dairy prices are weaker and the NZD is more elevated than what we had previously assumed. As such, it’s difficult to maintain a mid-$5/kg MS forecast for 2016/17…
A return to positive cash-flow will now not likely be seen until 2017/18.
The economic knock-on to the dairy sector and broader economy will be substantial. Lower dairy prices are at the forefront of a near 20% fall in New Zealand’s goods terms of trade over 2016; that’s a huge hit to the economy’s purchasing power and enough to knock up to 3 percentage points off GDP growth over two years.
Leith van Onselen is Chief Economist at the MB Fund and MB Super. He is also a co-founder of MacroBusiness.
Leith has previously worked at the Australian Treasury, Victorian Treasury and Goldman Sachs.
