Wednesday, 17 July 2013

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.

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