KEY POINTS:
After predictions of a drought, 2008 is shaping up to be a much better farming season than first thought, Westpac economists said today.
Weather forecasts suggest that New Zealand is on the cusp of strong La Nina conditions, normally linked to higher agricultural production, the bank said.
"This might seem like a pipe dream when the news has been of several soil-moisture deficits, particularly in Hawke's Bay, Marlborough and parts of Canterbury and Otago, weak grass silage production...and lamb numbers down 1.7 per cent."
But the Southern Oscillation Index was swinging towards strong La Nina conditions, which would bring more north-easterly winds and rain to the north-east of the North Island, and reduced rainfall in the south and south-west of the South Island.
Westpac expects world dairy prices to drift off their peak levels as more supply hits the market, but higher meat prices as drought-related destocking turns to restocking.
"The agriculture sector is set, on average to have a very good 2008."
Farming is expected to be a huge contributor to economic growth this year, with the dairy sector set to enjoy $4 billion plus extra cash in the year to August.
As a result, prices for agricultural supplies, farm values and rural retail spending were all up. Farm values were up 50 per cent in the year to November 2007, and rural retail spending was up 8 per cent for the year versus 3 per cent in the cities, Westpac said.
Australia's Macquarie Research also noted this week that the rising terms of trade in New Zealand, due to higher commodity prices, were likely to provide a "soft landing" economically.
However, there was a "high degree of uncertainty" surrounding New Zealand's growth prospects in 2008 and the risks were tilted towards the downside.
"Monetary policy is restrictive and global credit markets are in gridlock. Oil prices are soaring to record highs, while migration inflows have slowed to a trickle."
Domestic demand was already showing signs of strain and investors would have to remain alert.
While the global environment remained supportive of New Zealand's economy, the medium-term implications of the changed global credit market conditions and appetite for risk would have significant implications.
Policymakers would face challenges including the pressure for tax cuts in an election year, and pressure to keep spending modest to keep inflation down.
If current monetary conditions held, there was no need for further interest rate hikes, Macquarie said.
"The challenge for the central bank will be managing expectations to ensure that monetary conditions remain restrictive but not overly so."
Sectors exposed to housing and retailing would struggle, while firms exposed to favourable global conditions would prosper.
- NZPA
