Westpac warns El Niño could slow NZ GDP growth by up to 1%

Westpac Bank is flagging a climate risk that could reshape New Zealand's economic outlook over the coming months. As El Niño conditions develop, the bank warns that drought could take a meaningful bite out of the country's GDP—potentially slowing growth by as much as one percentage point in a worst-case scenario, according to senior economist Michael Gordon.

The threat centers on the farming sector, particularly the pasture-dependent industries that form the backbone of rural New Zealand: dairy, sheep, and beef. El Niño typically brings drought risk to eastern regions and the upper North Island, where reduced rainfall stresses pasture growth, cuts production, drives up operational costs, and disrupts the rhythm of processing throughout the year. Gordon acknowledged that the translation from global climate pattern to local weather remains uncertain. "There is still no certainty around how this big climate pattern translates into localised weather patterns in New Zealand, but certainly there are heightened risks there," he said. The bank's analysis suggests the primary impact will land hardest on farming, but the ripples will spread outward.

Transport and food processing industries could feel secondary effects as agricultural output shifts. For households, the concern is less about domestic meat and dairy prices—those may actually dip temporarily as farmers push more livestock through processors during drought—and more about the cost of imported foods. Gordon pointed to a subtler mechanism: when drought hits multiple agricultural regions globally, including Australia and Indonesia, it tightens supply of crops and ingredients worldwide. Vegetable oil prices, for instance, could climb. "It's perhaps more a question of what happens to prices of a lot of the foods that we import," Gordon explained. "Because this is an event that is affecting many parts of the world, it's difficult to trace all the effects of that but it generally means some upwards pressure on prices."

There is a natural brake built into New Zealand's farming calendar. Much of the dairy and meat production happens before drought becomes severe, which limits the immediate damage. The following year, however, as herds rebuild after culling during the dry period, prices are likely to rise again.

What distinguishes this moment from previous El Niño droughts is the sector's preparedness. Nearly three decades have passed since the last major El Niño-driven drought, and in that time New Zealand farmers have substantially adapted. Irrigation coverage has expanded, drought preparedness systems have strengthened, and soil moisture conditions are currently favorable. Farmers also have the advantage of early warning—they know the risk is coming. Gordon emphasized that these improvements mean the agricultural sector is "better placed than it was ahead of the last El Niño-led drought almost 30 years ago." The worst-case scenario of a full percentage point drag on GDP remains possible, but it is no longer the most likely outcome. The real test will come in the months ahead, as the El Niño pattern settles and its local effects become clear.