The return of European Union export subsidies for dairy products could accentuate the recession should it provoke a transatlantic trade war and tit-for-tat protectionist policies, a report warns.
ABN Amro Craigs chief investment officer Cameron Wright said should that happen, it would delay the economic recovery expected in 2010, and add to the recession.
"It will take strength of character for the Obama Administration to not react in kind. We have to remember that the end of the [EU's] CAP (Common Agriculture Policy) was one of the main drivers of the step change in dairy prices we have seen over recent years."
The decision to offer export subsidies for dairy products added to the risk ABN Amro Craigs' forecast economic growth this year of -1% could be too low.
Equally, Mr Watson said the news would not soften forecasts for the global economy to contract 0.5% this year.
"The EU decision certainly doesn't help, but we leave our forecast unchanged given it is well below all other forecasts, which we believe remain too optimistic."
The tough times facing the dairy industry along with retailing and construction have led the investment broker to predict New Zealand's official cash rate could fall to 2.5%, lower than the 3.5% it earlier forecast but reflecting the deteriorating economic outlook.
Equally, it predicted an exchange rate of US48c to the NZ dollar and annual inflation this year of 1.5%.
In his report, Mr Cameron said this year was always going to be full of gloomy economic news and poor company results.
"We believe the determined policy actions from most countries will underwrite a recovery, although this recovery will be slow."
