Trade figures show economy gathering strength for recovery

Two pieces of good news flowed out of this morning’s trade figures.

Statistics New Zealand released two sets of trade figures today: the overseas trade indices on a price basis (also known as the terms of trade) and the overseas trade indices on a volume basis.

The prices index for the December quarter, the terms of trade show the largest quarterly rise - 5.7% - since March 1976. This follows a year and a half of consecutive falls.

Import prices fell 5.8%, while export prices fell 0.3%. The export price fall follows some very large falls in the preview two quarters – 5.4% and 11.9% in the September and June quarters respectively.

There is some particularly good news on the capital goods front. The prices for capital goods continued to fall – they dropped 8.5% for the quarter, the largest quarterly fall since March 2003. This follows decreases of 7.2% and 5.2% for the previous two quarters.

This is partly driven by the high New Zealand dollar, and partly by suppliers overseas dropping prices in the face of the global recession.

That is not, in itself, particularly good news. What makes it so is when the volume figures for capital goods imports are looked at.

Capital goods imports rose 8.2% for the quarter, and these were the largest single component in the overall rise in import volumes. The main contributor within capital goods was increases of capital machinery and plant, which rose 4.3%.

That means New Zealand firms are, firstly, making use of the high New Zealand dollar and the other drivers of lower prices to boost their investment in plant and machinery.

That should pay off in higher productively as the economy turns around. It also bears out, at least to some degree, the business mood surveys, where firms have been showing an intention to lift their capital investment since the spring last year.

Until today, those intentions were not flowing through into the hard data, which led some to wonder if the recovery might stall.

The figures are not all good news. Export volumes actually fell slightly in the quarter, by 1.2%, the first decrease in volumes since September 2008. Falls in volumes of petroleum products, dairy, and fruit and vegetables were the main factors. Offsetting that, meat exports increased.

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