Plunge in dairy prices prompts warnings for New Zealand economy

Dairy prices plunged to a six- year low on Thursday, prompting warnings of hard times ahead for the New Zealand economy and forecasts of drastic interest rate cuts.

The fortnightly Fonterra-run GlobalDairyTrade auction saw the average price for New Zealand's main export commodity fall by 5.9 percent, taking down about 57 percent from last year's peak prices.

An Economic Note issued by the ASB Bank forecast the central bank would take a total of 75 basis points over three cuts to the official cash rate (OCR), currently at 3.25 percent, by the end of this year.

The dairy price plunge was one of a number of recent developments that "point to the risks of weak growth if the RBNZ ( Reserve Bank of New Zealand) doesn't reduce the OCR significantly further," said the note.

Previously analysts had expected the RBNZ to shave another 25 basis points off the OCR this year after dropping it from 3.5 percent last month.

However, the note said, business confidence had fallen across all sectors, the agricultural sector was facing a "drastic" decline, and growth in business activity looked set to slow in the second half.

Only the falling New Zealand dollar and accelerating credit growth that was fueling a "red hot" housing market could temper the RBNZ's cuts in the OCR.

The ASB Bank and other commentators said weakening demand in China, New Zealand's biggest market for whole milk powder, along with a global dairy glut was driving down dairy prices.

The main opposition Labour Party said falling dairy prices would create a growing "economic black hole" of at least 13 billion NZ dollars (8.71 billion U.S. dollars) and drive many farmers and supporting industries out of business.

"This latest fall comes on the back of business confidence turning negative for the first time in four years, stubbornly high unemployment, declining job advertisements, falling wage and employment confidence and a precipitous drop in exports," Labour finance spokesperson Grant Robertson said in a statement.

The opposition Green Party said a Treasury "downside scenario" to falling commodity prices, issued with the budget in May, was coming to bear.

"If Treasury's downside scenario is coming true, New Zealand can expect a blow-out in the current account deficit and nominal GDP (gross domestic product) 26 billion NZ dollars (17.42 billion U.S. dollars) lower than forecast out to June 2019," Green Party co-leader James Shaw said in a statement.

"Treasury also predicts further trouble for the government's books as a result of low dairy prices and low farmer incomes, including higher government debt and a delay in returning to surplus until June 2018."