Treasury is warning that the looming prolonged dry weather this summer, driven by El Niño, poses a potential risk to our economic outlook.
According to a newly released Treasury report, El Niño conditions were expected to have a “significant impact” on the weather as New Zealand progresses into summer.
Some economic impacts identified could stem from drought conditions affecting agricultural production, as well as hydro-power plants’ ability to produce electricity when lake levels are low.
The report said the current El Niño episode was anticipated to either reach or exceed “very strong” intensity in the coming months, making it one of the strongest on record.
Warmer-than-average sea surface temperatures are a typical marker of El Niño conditions.
Earth Science NZ (ESNZ) has reported that subsurface ocean temperature anomalies have continued to strengthen and expand across the tropical Pacific.
ESNZ said this has provided clear support for El Niño to intensify further and reach the “very strong” category.
“Under El Niño conditions, New Zealand’s summers on average have stronger or more frequent westerly winds which result in wetter conditions in the West and drier conditions in the North and East,” the report said.
Increasing the risk of drought?
The Treasury report said several historical El Niño events in New Zealand have caused severe droughts in eastern parts of the country.
“While El Niño conditions are associated with drought conditions, there is considerable uncertainty in terms of whether and where drought may occur.”
The report said this reflected that there was no average El Niño episode and that other factors also determined the weather.
El Niño has accounted for less than 25% of the year-to-year variance in seasonal rainfall and temperature in New Zealand.
Impact on wider economy
The report said severe drought conditions impacted agricultural production, which was most intensely felt at the individual farm level.
“If conditions are sufficiently widespread and prolonged, impacts are more likely to be visible at a wider economy level,” it said.
BNZ said strong El Niño events have tended to see agricultural GDP decline by a bit less than 4% per annum over two seasons, but it was reluctant to draw strong conclusions.
Meanwhile, ANZ said agricultural prices rarely rose during El Niño years.
“If prices do rise, it typically occurs 12 to 18 months later as the impacts work through the global agricultural season,” the Treasury report said.
The report said another channel through which weather conditions could influence economic activity was their impact on hydro storage levels and levels of hydro electricity generation.
“When lake levels are too low, electricity prices tend to increase.”
The impacts from El Niño were expected to be most significant over the latter part of summer.
The report said that while current favourable conditions were welcome, the extent to which conditions could change would be critical.
The Treasury concluded that El Niño was a potential risk to the economic outlook, but it would continue to assess this.
Assessments included monitoring soil moisture developments over summer.
