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Current as of 23/12/14 07:40AM NZST

Jamie Gray

Jamie Gray is a business reporter for the New Zealand Herald and NZME. news service.

Terms of trade at 40-year high

The string of stronger-than-expected economic data continued today with Statistics New Zealand reporting the country's highest terms of trade in 40 years.

Statistics NZ said sharply stronger dairy export prices have driven New Zealand's terms of trade to their highest point since 1973.

New Zealand's merchandise terms of trade rose 7.5 per cent in the September quarter, with export prices rising more than import prices.

"Dairy export prices helped lift the terms of trade to their highest level since 1973," Statistics NZ prices manager Chris Pike said in a statement.

The terms of trade is a measure of the purchasing power of New Zealand's exports abroad. An increase means New Zealand can buy more imports for the same amount of exports.

In the latest quarter, the price of exported goods rose 8.9 per cent, while seasonally adjusted export volumes fell 2.1 per cent. Both price and volume movements were strongly influenced by dairy products.

In the September 2013 quarter, dairy export prices rose 24 per cent to their highest level since 2008, and are now 46 per cent higher than a year ago.

ANZ senior economist Mark Smith said the strength of the data suggested the official cash rate, which sits at 2.5 per cent, was "increasingly at odds with the current economic backdrop".

The 7.5 per cent rise in the goods terms of trade was considerably stronger than the median market expectation. "This is a major support factor to the economy," Smith said in a commentary.

Westpac economists said the dairy sector was once again the stand-out performer with dairy prices up a "whopping" 23.9 per cent in the quarter but that the effects of last summer's drought continued to permeate the data.

Export volumes fell again in the September quarter, with further weakness in dairy exports. "An impressive rebound in dairy production this season, however, means this weakness will only be temporary," Westpac said.

While the terms of trade may edge a little higher yet, Westpac said it expected increased global supply to weigh on key commodity prices next year, with softer export prices to lead the terms of trade lower in 2014.

Today's release follows data last month from SNZ that showed the unemployment rate fell 0.2 percentage points, to 6.2 per cent in the September quarter.

Consumer and business confidence surveys have also shown an improvement.

Several economists are forecasting a pickup in economic activity next year, based on a very strong construction sector - driven mostly by the Canterbury rebuild - and bouyant prices for most of the main commodity export groups, led by dairy.

- APNZ

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