New Zealand’s rock star economy has crashed and burned within 18 months. The hotel room has been trashed, the limo is in the pool and hangovers have taken the place of Champaign breakfasts.
The writing has been on the wall for some time. The downward spiral of dairy prices, a NZ dollar in free fall, dwindling interest rates, falling business confidence and a turn-down in building activity in Christchurch are all signs that the country has had the requisite 15 minutes of fame to qualify as a rock star. New Zealand is now relegated to the ‘one hit wonder’ section of the Golden Oldies charts.
Just when it looked like a session in rehab would save it, one of the country’s leading economists is now warning of a recession risk. If you’re on the verge of buying tickets for a NZ concert tour this may be an excellent time to see what else is available.
BNZ head of research Stephen Toplis said the biggest shock to New Zealand’s economy had been the ongoing demise of the dairy sector. he 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. 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.
Toplis said “it is not hard to envisage a scenario where a recession becomes imminent…” and he says it could be prompted by the following:-
- A continuation of the dairy price decline (which, Toplis said, was quite plausible).
- 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.
That last factor could be the killer blow. New Zealand relies on positive net migration to boost income and keep the economy afloat. Each migrant and international student is worth tens of thousands of dollars to a rock star economy that is more milk than champagne.
And with milk prices in free fall due to over supply who knows where it will end.
Dairy prices fell at Fonterra’s international auction on Wednesday, the eighth fall in a row taking prices to 30 per cent below their recent peak in March.
This means farmers are likely to receive a lower payout from the dairy giant – which will have a strong effect on the wider economy dampening consumer spending, investment and government revenue.” source
The outlook must be grim because even Steven Joyce has warned of a “bumpy economy amid gloomier bank forecasts.”
Incidentally, despite falling international dairy prices, and supply outstripping demand, many New Zealanders cannot afford to buy milk. Dairy products in the land of the Anchor cow are so high that the Prime Minister was forced to dismiss it while advising the audience to drink water. Meanwhile the number of rickets cases in NZ is on the climb.
Meanwhile, over on the other side of the globe, America has been pouring its surplus milk lake down the drain and slaughtering dairy cows since January, in an effort to stabilise milk prices. A gallon of milk is now less than $3 USD (.I.e. 3.8 Litres for $4.48 NZD).
All well and good, let’s all drink water instead of milk. But do you know how poor NZ’s water quality is? Ironically, most of the environmental degradation in New Zealand is the dairy industry pollution of drinking water catchments (NZ has 6.5 million dairy cattle, up 27% since 2007.. Source).
If New Zealand is the rock star, dairy cows are the drums and lead guitar.
You may also find interesting
Holy cow! milk supplies overwhelm US dairies (Stuff.co.nz)
There’s so much milk flowing out of US cows these days that some is ending up in dirt pits because dairies can’t find buyers.Domestic output is set to be the highest ever for a fifth straight year. Farmers are still making money as prices tumble because of cheaper and more abundant feed for their herds. Supplies of raw milk are topping capacity at processing plants in parts of the US and compounding a global surplus even with demand improving.
Agri-Mark, a 1200-dairy cooperative in New England that had US$1.1 billion (NZ$1.64bn) of sales last year, started pouring skim milk last month into holes used for livestock manure. It was the first time in five decades, and farmers so far have unloaded 12 truckloads, or 272 metric tons. While having small amounts of milk spoil or go unsold isn’t unusual, Northeast dairies dumped 31 per cent more this year through May than the same period of 2014, government data shows… read on