Terms of trade sets new 40-year high as cheaper imports offset falling exports

ASB rural economist Nathan Penny

New Zealand's terms of trade held at a 40-year high in the second quarter, as a high New Zealand dollar pushed down the price of imports, offsetting a decline in exports.

Terms of trade, which measures the quantity of imports the country can buy with a set amount of exports, edged up 0.3 percent in the three months ended June 30, from a previous quarterly gain of 1.8 percent in the first quarter of this year, according to Statistics New Zealand. The measure is at its highest level since September 1973. The quarterly gain compares with a forecast 2.3 percent drop in a Reuters survey. (See graph below)

The terms of trade was largely expected to have peaked in the first quarter, with economists expecting a correction as prices for dairy products, New Zealand's largest export, have tumbled some 40 percent at the GlobalDairyTrade auction since the start of the year. Last week New Zealand posted its first monthly trade deficit for the month of July, meaning more was coming into the country than going out, as the price of logs, the third largest export, dropped some 16 percent in the year. The series is now just 1.3 percent below its all-time high in the June 1973 quarter.

"For a change weak import prices, drove the terms of trade improvement, rather than improving export prices that we have seen in previous quarters," said Nathan Penny, economist at ASB Bank. "However, that record-high is set to live another day as we expect the terms of trade to fall from next quarter. The export price falls this quarter give just a taste of what is to follow."

In the second quarter New Zealand's trade weighted index, the Reserve Bank's preferred measure of the dollar against a basket of export partners' currencies, rose 1.9 percent. A rising dollar pushes down the price of both exports and imports, Statistics NZ said. The TWI was recently at 78.93, slightly higher than 78.88 immediately before the data was released.

Export prices overall dropped 2 percent in the quarter, while excluding dairy it fell 1.2 percent. Dairy prices declined 4.3 percent in the quarter, and was up 20 percent from the same quarter a year earlier. Forestry product prices declined 6.5 percent in the quarter, and slipped 0.3 percent in the year. Meat prices rose 0.1 percent on a quarterly basis, and advanced 8.3 percent in the year.

Import prices fell 2.3 percent in the quarter, with declines across all measures led by 3.9 percent quarterly drop in petroleum products, while it declined 4.3 percent from the same quarter a year earlier. Electrical machinery and apparatus also dropped 3.9 percent, and were down 14 percent in the year.

Seasonally adjusted, export volumes fell 5.3 percent in the quarter, the largest fall since March 2008, led by an 8.3 percent drop in meat export volumes, while forestry also fell 8.3 percent and dairy volume decreased 2 percent.

Seasonally adjusted import volumes advanced for its seventh consecutive quarter, up 3.6 percent, lead by capital goods, Statistics New Zealand said.

(BusinessDesk)

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