Our exports may fall by $3 billion this year, says BNZ

BUSINESSDESK: New Zealand's exports of goods may decline by $3 billion over the next 12 months, led by food products as global prices fall and the kiwi dollar remains stubbornly high, say BNZ economists.

A drop in food exports would follow a 10% increase to about $26 billion by early this year from 12 months earlier.

The next 12 months may be characterised by falling commodity prices, a high dollar and less favourable weather conditions, the bank said.

"At the farm level this equates to such things as a lower dairy payout, lower lamb and wool prices.

"That's a negative for producers and also there will also be negative flow-on effects for others as farmers curb discretionary spending.

"The general reduction in food export revenues will become a drag for economic growth following a period where it was a very welcome and strong tailwind," it said.

Prices of dairy products had their biggest decline since July 2010 in Fonterra Cooperative Group’s GlobalDairyTrade auction a fortnight ago, pushing the price index below its 10-year average.

The index fell 9.9% and prices fell for all six products on offer and across all contracts.

Reserve Bank governor Alan Bollard held the official cash rate at 2.5% last week, citing a “restrained” outlook for inflation, while warning that the kiwi strength may prompt a review of monetary policy.

“The New Zealand dollar has stayed elevated despite recent falls in commodity prices,” Dr Bollard said

“Should the exchange rate remain strong without anything else changing, the bank would need to reassess the outlook for monetary policy settings.”

The BNZ says it is important for the Reserve Bank to keep a watch on the downswing in commodity prices.

"Softer commodity prices/stronger New Zealand dollar need to be weighed up against everything else in setting monetary conditions." 

The bank forecast New Zealand's current account deficit to increase to 6% of gross domestic product by the end of the year, up from 4%.

It also predicted a 10% decline in the terms of trade over the next 18 months.