A developing El Niño climate phenomenon pattern threatens an increased risk of drought in many parts of New Zealand, with the main economic risk being to pasture-based agriculture, Westpac said in a report on Friday.
A strong El Niño is developing and could intensify further, raising the risk of hot, dry conditions across parts of New Zealand over summer. It is expected to strengthen further in the next few months and persist into mid-2027. Dairy, sheep and beef farming in particular are at risk, where drought can reduce pasture growth, lower production, raise costs and disrupt processing patterns across the season.
In worst-case scenarios, severe droughts in the past have led to as much as one percentage point being cut from gross domestic product growth.
There is a clear downside risk to agricultural production, and these impacts are predominantly supply-side effects that reduce potential output. However, the impact is highly uncertain, the bank cautioned.
Inflation effects are likely to be mixed but pointing higher, with potential upward pressure on dairy and imported food prices, partly offset by downward pressure on meat prices in the near-term.