The economy could get tripped-up if there was another step lower in dairy prices, consumer demand in China dwindled, or an El Nino drought sapped agricultural production, the IMF said.
Of those risks, dairy prices and El Nino were seen as having an “unusually high” degree of uncertainty given the volatility of dairy prices and the NZ industry’s ability to cope with changes, while the well-established weather pattern of El Nino had yet to show its effect.
In laying out its risk assessment case, the IMF rated an El Nino drought as a medium likelihood, giving it between a 10-30% chance of occurring in the next year.
That would reduce NZ’s dairy output, which would probably be partly offset by higher prices, and may warrant monetary support.
In terms of a sharper slowdown in global growth, the IMF assessed structurally weak growth in key developed and emerging economies as also having a medium likelihood over the next three years, which would put pressure on NZ’s terms of trade.
A significant Chinese slowdown, putting downward pressure on commodity prices was regarded as having a low chance, or less than 10%, of happening in the coming year, rising to a medium likelihood in a three-year horizon.
The IMF didn’t map out a direct risk assessment for dairy prices to decline, instead including a recovery in its matrix for an upside scenario.
The international funding agency gave that a low chance of happening in a one-to-three year horizon, which it said would mean the Reserve Bank would have to “carefully assess” the economy before ending the current rate-cutting cycle.
