Thursday, March 28, 2024

Southland economy headed for slowdown

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Southland, the New Zealand region most exposed to the meat, wool and dairy industries, is expected to see its economic fortunes worsen in the first quarter of this year as commodity prices deteriorate.
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While Waikato is the largest employer for the industries, they play a bigger role in the Southland economy, meaning the dairy downturn will hit Southland 3.7 times more heavily than New Zealand overall, according to Westpac Banking Corp’s latest regional roundup report.

In the final quarter of 2015, the country’s southernmost region recorded a dramatic turnaround in economic confidence, turning to a positive 16 percent from a negative 36 percent in the September quarter.

“This switch was largely the result of improved dairy prices, which unfortunately does not bode well for the March survey,” Westpac industry economist David Norman said in the report. “Falling dairy prices in the New Year may see confidence dissipate.”

Southland’s employment confidence also lifted in the fourth quarter as conditions improved, increasing to 101.4 from 96.6 in the previous quarter, and Norman noted this may also be short-lived.

The region’s tractor sales, an indicator of on-farm confidence, were largely unmoved in the latest quarter, slipping to a reading of 72 from 73 in the September quarter, and below the five-year quarterly average of 75.

“This suggests farmers remained cautious on big-ticket spending in December despite the upturn in dairy prices at the time,” Norman said.

Westpac currently expects Fonterra Cooperative Group to pay farmers $4 per kilogram of milk solids this season, and $4.60/kgMS next season, following a $4.40/kgMS payment last season.

“This is sharply down on expectations in December, which will mean less money in the pocket of Southland dairy farmers, less discretionary and investment spending (on tractors, for instance), and more efforts to cut on-farm costs, which will flow on to other sectors,” Norman said.

Improvements in Southland’s unemployment level and in house prices may be hard to sustain short of a substantial recovery in the fortunes of the dairy sector, he said.

Meat and wool prices, while not as weak as dairy, are likely to come under pressure over the next few months, and Norman said an expected decline in lamb prices will reverberate across Southland much more strongly than elsewhere in the country.

“At the same time, services, where much of the good news is occurring in New Zealand at present, are relatively under-represented, limiting the opportunities for growth in the region,” he said.

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