Foot and mouth would cost NZ $10 billion - analysts

By NZPA

Friday 14th February 2003

A Reserve Bank paper produced for the Prime Minister's Department today disclosed that an outbreak of foot-and-mouth in New Zealand would cost the nation $10 billion in the first two years.

The analysis of the likely economic impacts of a limited foot-and-mouth disease outbreak in New Zealand does not take into account the effects on the financial sector, but said it was likely the value of the New Zealand dollar would plunge by 20 percent over three months, and take 2-1/2 years to recover.

A foot-and-mouth outbreak would also slash 20,000 jobs -- though the bank's economists warned they were probably underestimating the effects on employment.

"If farms and employers in the related industries expect a longer-lasting decline in output than the one currently assumed, then the number of layoffs would be significantly higher," they said in the paper, released today on the bank's website.

The analysts, Aron Gereben and Ian Woolford, of the Reserve Bank, and Melleny Black, from Treasury, said the effects of the hypothetical outbreak used in their computer model reduced the gross domestic product (GDP) of the national economy by 4 percent in the first three months, with recovery taking 15 months.

In the first year, $6 billion would be wiped from GDP, rising to a total of $10 billion over two years -- twice as much as has estimated by Ministry of Agriculture and Forestry economists.

The economy would never fully recover because there would be a permanent drop on the meat industry's earning potential.

Companies would delay or cancel investment in New Zealand, by about 20 percent in the short term and 6 percent in the long run. The combined effect of a drop in householders' wealth, a net 2.5 percent drop in the nation's foreign assets, and falls in export volumes and prices, would require additional overseas borrowing of $8 billion.

The scenario was based on the assumption of a foot-and-mouth outbreak that initially occurs in pigs through waste food, and then spreads from pigs to sheep or cattle. It allowed for the outbreak to be contained in the North Island, allowing trade from the South Island to resume earlier, and farmers did not vaccinate the animals.

The impact on dairy exports was assumed to be "muted", other than having to cope with a six-week ban on dairy exports.

But the impact on beef and sheep exports was assumed to last between six and 12 months, with little scope to divert exports to markets that did not care about foot-and-mouth.

There would be a big drop in export prices, and the nation's meat industry would face severe problems with storing the unsold meat.

Only about one month's meat production can be stored in freezers or on farms, and any further losses are permanent. The cumulative effect would be an 8 percent loss of annual merchandise exports.

Even when markets were re-opened to New Zealand meat, there would be a significant loss of reputation "which would result in decline in the premium that New Zealand lamb and beef products currently enjoy on the European and other markets". Prices would not recover for at least four years. At the same time, foreign investors would become more reluctant to invest in New Zealand, leading to a permanent decline in the capital stock and the long-term potential output of the economy.

On the plus side, inflation in New Zealand would fall by around 1.5 percentage points, despite the large devaluation of the New Zealand dollar: 90-day interest rates would bottom around 1-2 per cent, and long-run real interest rates would decline by around 50 basis points.

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