The Economics of Drought in New Zealand

Post written by H. Griffin.

The drought earlier this year was the worst New Zealand has seen in decades. Measures of soil moisture deficit were at their highest since the 1970s and a drought zone was declared over the entire North Island and parts of the South Island. With climate change the likelihood of more frequent and severe droughts is increasing. With this, so too is the need to better understand how the New Zealand economy reacts to such events.

 

The Reserve Bank of New Zealand (RBNZ) has recently released a paper exploring the macroeconomic impact of droughts in New Zealand. It focuses on the direct impacts to the agricultural sector as well as the indirect flow-on effects to other parts of the economy.

Their models predict that the 2013 drought will lower economic growth by 0.4% in the second quarter. Annual GDP (the average across all four quarters) is predicted to be 0.3% lower than without the drought. Beyond this, they predict GDP will recover to normal over the following years.

The RBNZ paper highlights the complexity of economic reactions to climatic events. Their models show that drought in New Zealand is associated with higher world dairy prices. The models predicted that the drop in export volumes following the drought in 2013 would be initially followed by a rise in export prices. With this, the models suggest nominal GDP (GDP not adjusted for inflation) could rise following the 2013 drought. Such increases have the potential to offset some of the initial negative economic implications of a drought.

Food Security and Climate Change

A recent article in the Guardian highlights the increasing importance of food trade globally. Of the countries investigated in the study, 66 currently do not produce enough food to feed their people - roughly 16% of the global population. By 2050 the study predicts that over half of the world’s population will rely on imported food – making global food security more reliant on international trade. The predictions do not take into account the impact of climate change on food supply which could exacerbate the situation.

It is now thought that climate change is going to significantly impact our global food system by shifting where food is grown, in what seasons and in what quantities. Including these possibilities into the predictions of global food security is a necessity if we are to think ahead.

A new study in New Zealand is aiming to look into these issues for our own country. The CCII or Climate Change Impacts and Implications for New Zealand study led by NIWA and Landcare Research will explore the consequences of different climate trends for New Zealand so we can better prepare for these coming issues. The study will generate improved climate projections for New Zealand based on the latest global modelling and evaluate key pressures on and responses of five important environments (alpine, hill-country, lowlands, coastal and marine). The study will also explore feedbacks, cumulative impacts and limits at the national level from the interaction of climate, population, land-use change, economic development, and increase the relevance of climate change in decision making processes. The aim of this project focuses on extending New Zealand's foresight into the issues of climate change and how primary industries such as agriculture can respond to these challenges.

Another part of the equation of global food security is that New Zealand is currently a global food producer. If these predictions come to play and the world is significantly dependent on imported food - New Zealand may be a source of those food supplies for other countries. The increase in demand may offset the economic losses resulting from lowered agricultural production from extreme weather events. The potential negative and positive impacts of these shifts in agricultural production show how complex these issues are.

For more information, check out these condensed and interesting resources on what we know in New Zealand about the interactions between climate change and agriculture.