El Nino events sap NZ growth, inflation, IMF research says

Major El Nino events, which typically create extreme weather conditions, immediately sap New Zealand's economic growth and put downward pressure on inflation, according to International Monetary Fund research.

New Zealand's gross domestic production growth drops by 0.29 percent in the quarter immediately after an event as drought in parts of the country and flooding in other places saps agricultural production, Paul Cashin, Kamiar Mohaddes and Mehdi Raissi said in an IMF working paper. New Zealand's initial slowdown in economic growth is shared by Australia, Chile, Indonesia, India, Japan and South Africa, as the higher temperatures and droughts constrain the supply of rain-driven agricultural commodities and drive up food prices, sometimes triggering social unrest on nations reliant on importing food. (See report attached here)

Unlike most other countries in the research, New Zealand also experiences disinflation of 0.61 percent after four quarters following the event as the weather events increase the likelihood of recession, wage and price freezes and structural reforms, as well as the country's well-anchored inflation expectations with the Reserve Bank's target band of 1 percent-to-3 percent average, the paper said.

"The sensitivity of growth and inflation in different countries, as well as global commodity prices, to El Nino developments raises the question of which policies and institutions are needed to counter the adverse effects of such shocks," the paper's authors said. "These measures could include changes in the cropping pattern and input use (eg seeds of quicker-maturing crop varieties), rainwater conservation, judicious release of food grain stocks, and changes in imports policies/quantities - these measures would all help bolster agricultural production in low-rainfall El Nino years."

New Zealand experienced drought conditions in some regions earlier this year, which were expected to eat into domestic dairy production, though those fears ended up being unfounded with farmers now forecast to increase production from a year earlier. During the 2012/13 summer, the North Island's dairy hub, the Waikato, suffered its worst drought in 70 years, which the Treasury estimated knocked $1.5 billion out of gross domestic product in 2013.

The IMF research covered the macroeconomic impact of El Nino shocks from 1979 to 2013 across 21 countries and regions to assess the economic impacts of the adverse weather changes and the spill-over effects on commodity prices and inflation.

El Nino events drive up non-fuel commodity prices by 5.31 percent after four quarters as lower production saps supply, and also leads to higher demand for coal and crude oil as less electricity is generated from thermal power plants and hydro-dams, the paper said. Water demand for irrigation use also rises, which drives up energy prices further, and the researchers found crude oil prices "sustain a statistically significant and positive change following an El Nino shock" of almost 14 percent after four quarters.

The paper's authors also recommended investment in irrigation as well as building more efficient food value chains should be considered by policymakers in their long-term response to El Nino events.

(BusinessDesk)