Terms of trade fall from record peak

The terms of trade have shown their first quarterly drop in 28 months, dropping 0.7% for the three months to September 30.

This drop is coming off a record high: the previous quarter saw the terms of trade at their highest level for 37 years.

The annual terms of trade - which measures the balance in the change of prices paid for imports versus prices received for exports - is still positive, rising 3.3% for the year to September.

This follows an 18% rise in the previous 12 months and a 14% drop in the 12 months prior to that.

Export prices fell 4% in the September quarter, a shift Statistics New Zealand puts down largely to rises in the exchange rate.

The New Zealand dollar hit an all time high against the US currency at the end of July, rising just above US88cents.

Even more importantly, on a trade weighted basis (TWI) the currency rose 4.2% over the quarter, increasing against four of the five major currencies with a the only drop being against the yen.

The result is a 4.8% drop in dairy prices, a 9.1% drop in forestry prices and a 4.8% drop in meat prices.

Figures on trade volumes - also released today with the terms of trade figures - show a less drastic picture. Volumes exported over the quarter also fell but by a much lower 0.7%. The main drop was in non-food manufactures, which fell 5% - items such as aluminium, plastics and machinery.

On the import side of the ledger, prices also fell, but by a lower 3.4% rate.

Again, the exchange rate seems to have been a factor, although this time a positive one: it has pushed down prices for imports of business inputs such as mechanical machinery (down 6.5%) and electrical machinery and apparatus (down 4.7%).

This drop in cost is underlined when looking at the trade volumes figures. Import volumes are up 2.7%, and when the always-volatile fuel figures are excluded, the rise is even higher, at 4.8%.

The rise in imports is driven almost solely by businesses taking advantage of the high exchange rate.

Capital machinery and plant imports rose 15% over the quarter, and capital transport equipment rose 16%, although this figure has a tendency to jump around dramatically if an airline buys an aircraft or the navy buys a boat or some similar purchase takes place.

In this case, the purchase of rail wagons by KiwiRail appears to have shoved the quarterly data upwards and there will be a concomitantly dramatic fall in the next quarter unless the air force needs a helicopter or something.