A cut to Fonterra’s milk price forecast could wipe $5b off New Zealand’s GDP as China’s economy falters, writes Anna Rawhiti-Connell in this excerpt from The Bulletin, The Spinoff’s morning news round-up.
‘This isn’t just a shower, it’s an iceberg coming through’
Forget talk of fiscal holes, although this may contribute to the shape of the government’s books, we’re now staring down the barrel of a “dairy cash hole”. The front page of this morning’s Waikato Times is focused on the impact of last Friday’s milk price forecast announcement from Fonterra. The dairy giant has reduced its 2023-24 season forecast farmgate milk price range from $7.25-$8.75 per kg of milk solids down to $6.25-$7.75. The accepted rule of thumb these days is that farmers need $8 per kg to break even. Waikato Federated Farmers president Keith Holmes says it could result in “billions” worth of cuts in total spending with wide-reaching effects across the economy and 70-80% of farms running at a loss. He describes the looming situation as “an iceberg coming through”.
‘Most farmers paid bugger-all tax last year and they’re going to pay none this year’
Holmes is not alone. The Herald’s Andrea Fox and Jamie Gray (paywalled) do an excellent job of outlining the broader economic ramifications of Friday’s news. Rural economist Phil Journeaux says the milk price forecast will wipe $5b off the country’s GDP. To put that in context, before the pandemic the value of New Zealand’s international education sector was estimated to be worth $5b a year, making it our fourth largest export at the time. Coincidentally, according to the last set of government accounts published in July, Crown debt has risen by $5b above forecast to $73b. At the time, the deterioration in the government’s books was attributed to tax revenues being $2.2b behind forecast. The milk price forecast will not be music to the ears of the current or any future finance minister, with Journeaux saying “Most farmers paid bugger-all tax last year and they’re going to pay none this year. The tax take from farming will be well down”. The next opening of the government’s books is the much-awaited Pre-election Economic and Fiscal Update (PREFU) on September 12.
China on the brink of deflation
Weaker than anticipated demand from China is cited as one of the primary reasons for the reduction in the milk price forecast. In a recent article, Andrea Vance asks why we’re not talking more about the implications of the economic slowdown in China for New Zealand. Globally, concerns about the state of China’s economy have been rising since late June after early hopes of a post-pandemic “return to normal” proved to be shortlived. A section in the Financial Times dedicated to China’s economic slowdown (paywalled) that hadn’t been added to since October 2022 now carries a few new stories. The most recent, published on August 2 (paywalled), spells out the seriousness and the uniqueness of the situation in China where the economy is still expected to grow but, as the rest of the world battles inflation, China is on the brink of deflation. Youth unemployment was at 21.3% in June. President of the Peterson Institute for International Economics, Adam Posen penned an article for Foreign Affairs last week headlined “The End of China’s Economic Miracle”. It skews towards the potential for the US and other Western economies to gain from the situation but is worth a read for the examination of the political context. Posen writes that “China today is gripped by widespread fear not seen since the days of Mao.” In the last couple of days, news has leaked out of local economists in China being warned not to discuss the country’s economic woes.
