20 Sep 2013

Drought stops economy taking off

5:58 am on 20 September 2013

Analysts say the economy would be rocketing away if it wasn't for one of the worst droughts on record.

Growth slowed to a modest 0.2% in the June quarter.

Dairy and meat production, the country's main export earner, has slumped more than a tenth since the start of the year due to the drought.

Meat Industry Association chief executive Tim Ritchie says the drought has had a severe impact on farmers and meat works.

He says at one stage about 40,000 animals were being slaughtered each week, when the normal figure would have been 10,000 - 15,000. That led to greatly reduced slaughter numbers in the second quarter.

Dairy production has since rebounded, but Mr Ritchie says the red meat sector may take a couple of years to fully recover.

Usually, a decline in the country's main export earners would be disastrous but robust domestic demand has more than made up for it.

Construction is roaring ahead, while consumer spending remains robust.

Fletcher Building head of infrastructure Mark Malpass says underlying demand for cement has picked up, although it remains modest.

He says demand for such materials has been led by Canterbury, and to a lesser extent Auckland, although he expects that to hot up and broaden in coming years.

Some economists are picking annual growth, which is currently 2.7%, will start rising gradually to 4%

ANZ Bank senior economist Mark Smith says low interest rates, a higher forecast for dairy payouts, rising wages and house prices will stoke spending and put pressure on inflation.

Mr Smith warns there are still risks that could trip up the economy, including a surging New Zealand dollar and mixed global economic picture.

However he and many of his counterparts still expect the Reserve Bank to start increasing interest rates by March.