(BigPondNews) - The Treasury forecasts the summer drought will knock 0.7 of a percentage point off annual economic growth, more than twice the 0.2 to 0.3 per cent forecast by the Reserve Bank of New Zealand last month.

In its monthly economic update, the Treasury says the spike in global dairy prices will help offset some of the drought's impact and that the rest of the national economy is feeling chipper, especially the two largest cities: Auckland and Christchurch.

With drought still not officially broken in many parts of the country, the Treasury assumes it gets no worse than it is now, 'but that the impacts will continue to be felt for some time' and if dry, cold conditions were to set in, further downward revision would likely be required.

Most of the 0.7 percentage point impact on inflation-adjusted, or real, gross domestic product is likely to be contained in this financial year. That means GDP growth in 2013 of about two per cent, compared with the 2.7 per cent forecast in last December's half year fiscal and economic update.