KEY POINTS:
New Zealand faces conditions that are eerily similar to those which preceded the 1998 recession, the Bank of New Zealand says.
The bank is forecasting a slowdown, but not a recession, this year but it says the risks to the economic outlook are "massive".
"On top of a worsening global backdrop and a weaker-than-expected local housing market, we are potentially also facing a repeat of the 1998 drought - with a dose of the 1992 power crisis thrown in for good measure," BNZ economist Mark Walton said.
As in 1997, after a period of sustained economic expansion, household balance sheets are stretched, the housing market is softening rapidly and consumer confidence is in decline.
Then there was the Asian crisis, now there is the sub-prime crisis, the fallout from which is threatening to topple the US into recession.
In 1998 it was drought which ultimately pushed the New Zealand economy into recession, Walton said.
Agricultural activity declined by about 5 per cent which, with the flow-on effects, was enough to knock 1 per cent off economic growth.
"The current water shortage is arguably just as severe as that of 1998. Areas in which water is typically in abundance for most of the year, and which escaped relatively unscathed in 1998, are among those suffering the most. Waikato for example," Walton said.
Fonterra had suggested production worth $500 million could be lost this season, he said. The weekend's rains will have been welcomed.
But Walton said any drought-breaking downfalls would be little consolation to farmers who had already dried off their herds or sent ewes to the works.
"In 1998 the driest areas were largely confined to the east coast of the North and South Islands and hydro lakes remained relatively high. By contrast lake levels currently sit at 72 per cent of average, almost exactly where they were in 1992, a year of winter electricity rationing and cold showers," Walton said. "Most worryingly, lake inflows are well below those of 1992."
Though generators had pointed out there is little value in making predictions regarding winter storage levels before the beginning of April, the National Institute of Water and Atmosphere (Niwa) put the chances of a continuing dry spell in the lakes catchment area at 50 per cent.
Genesis Energy chief executive Murray Jackson last week warned that the electricity industry had a 1000MW gap to close to prevent a power shortage this winter.
Appearing before Parliament's commerce select committee, Jackson said peak demand right now was 1700MW or 25 per cent lower than peak demand in the middle of winter.
Some 630MW of the difference should be met when Contact Energy's Taranaki combined-cycle gas plant comes back on line in about four weeks after an overhaul and one of Genesis's four 250MW coal-fired turbines at Huntly, which is also undergoing maintenance, should be available by winter too.
Contact Energy chief executive David Baldwin, on Friday struck a more confident note: "If it is carefully managed and with a bit of luck and a bit of rain ... we will navigate through it comfortably."
