Fall in dairy income likely to weigh on New Zealand’s investment and consumption growth in next few years

In H2 2015, the New Zealand economy has had a reasonable run of growth after a slow start to the year. New Zealand’s economy expanded 0.9% in Q4, matching the growth in Q3 and exceeding market forecasts of a growth of 0.7%. Annual GDP growth of 2.5% is decent; however, most of that shows the weight of numbers. Strong net immigration indicates that population increased nearly 2% during that period. Per capita GDP growth continues to be relatively slow.

Furthermore, the economic growth figures do not entirely take in the degree to which national income has been impacted from the decline in dairy export prices. The decline in dairying income is expected to weigh on investment and consumption growth for the new few years. Also, even though tourism has posted solid growth in the past, it is unlikely to help counter the dairy downturn.

Delving into details, production GDP grew 0.9% in Q4, and was split between weakness in several primary industries versus solid growth in services and construction. The split is likely to continue into 2016. During the fourth quarter, agricultural sector was soft, with output dropping 1.6%. In seasonally adjusted terms, milk production grew somewhat in Q4 after a slow beginning to the dairy season. Meanwhile, manufacturing declined 1.1%, mainly because of decline in fruit processing, uncoiling the strong growth in Q3. Non-food manufacturing performed much better, growing 1.9%.

Construction activity in Q4 increased 2.5%, reversing a surprising drop in Q3. Even of the construction trend has flattened out in 2015, it is still likely to be an important driver of growth over the next year. Service sectors witnessed a strong quarter, except for cert ain divisions.

Financial services, information media and communications, and professional services posted solid growth as expected. Retailing grew 1.7%, while healthcare, arts and recreation and other personal services also recorded gains. Meanwhile, transport and warehousing dropped 0.8%, whereas wholesaling was almost flat. Rental, hiring and real estate services recorded growth but at a slower pace. This shows decline in house sales following the new restrictions on property investors.

The expenditure measure of HDP was much stronger than the production measure. It grew 1.1% in Q4 as compared with 1.4% growth in Q3. Meanwhile, the real gross national disposable income declined 0.1% in per capita terms and has declined 0.4% over the last year.

The drop in world dairy prices has been a major shock to incomes rather than to activity. However, it is unlikely to remain that way. A third consecutive season of low returns to dairy farming will result in reductions to investment and spending in the next few years, and the impacts are not expected to be isolated to the rural regions.