The New Zealand Treasury forecast Monday that the ongoing drought affecting all the North Island and parts of the South Island will shave about 0.7 percent off the country's economic growth this year - assuming it gets no worse.

The southern summer has been the driest in at least 40 years for New Zealand farmers and the drought was not expected to break at this stage, according to the Treasury's Monthly Economic Indicators report.

"The Treasury's estimate takes into account the expected direct impacts of the drought on lower agricultural production, including reduced dairy and meat production and earlier than usual meat slaughter and processing, as well as indirect multiplier effects throughout the economy," it said.

Total milk production over the season was likely to be at least 1 percent down from last season, but meat slaughter was "well ahead" of last year as farmers were forced to reduce stock numbers.

Some of the effects of the drought could be offset by higher global dairy prices, said the report.

"The indirect impacts of the drought on the rest of the economy will be more akin to a negative demand shock in the economy, leading to more typical negative price impacts, including on wages and inflation."

Another effect of the drought was the impact of lower lake levels on hydroelectric power generation, which could hit GDP if producers turned to more costly thermal generation and passed on their costs. Endi

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