New Zealand enjoyed the most favourable mix of export and import prices for 41 years in the June quarter, but economists warn such a high terms of trade is on borrowed time.
The terms of trade rose 0.3 per cent as a 2.3 per cent drop in import prices outstripped a 2 per cent decline in export prices. It means 0.3 per cent more imports could be funded by the same quantity of exports than in the March quarter.
But the figures are based on documentation exporters and importers filed with Customs between two and five months ago.
Forward-looking indicators tell a less cheerful story, notably Fonterra's fortnightly dairy auctions, where prices have fallen more than 40 per cent from their peak last February.
ANZ's export commodity price index is nearly 10 per cent off its February peak.
"The 4.3 per cent fall in dairy prices [in yesterday's report] reflects only the first stage of the drop in world prices that we've seen in dairy auctions in recent months," said Westpac economist Michael Gordon.
"The greater share of the fall in prices will be captured by product that is shipped during the September and December quarters."
Gordon expects the terms of trade to fall about 10 per cent over the next year, "though it should be noted that we see the recent softening in export prices as a temporary factor, as Chinese buyers work through a build-up of inventories".
Compounding the drop in export dairy prices was a 2 per cent decline in the volumes of dairy products shipped out during the quarter. Forest products suffered an even harder double whammy: prices down 6.5 per cent and volumes down 8.3 per cent.
Meat volumes fell 8.3 per cent but prices held up, rising 0.1 per cent despite the more adverse exchange rate. Exports of manufactured goods and fish also declined in real terms, by 2.1 and 6.4 per cent respectively.
The 2 per cent overall fall in export prices in the June quarter mirrors a 1.9 per cent rise in the kiwi dollar's trade-weighted exchange rate.
A high currency depresses both export and import prices. In addition to the strong kiwi, very weak global inflation is flowing through to lower import prices, said ASB economist Nathan Penny. "In the European Union and United States, for example, core inflation is running at 0.9 per cent and 1.5 per cent respectively."
Lower crude oil prices saw import prices for petroleum and petroleum products fall 3.9 per cent, after a 3.5 per cent decline in the March quarter.
The latest rise in the terms of trade puts it just 1.3 per cent off its all-time high in June 1973. But Penny expects it to fall by more than 15 per cent in the year's second half.
• Most favourable mix of export and import prices for 41 years in the June quarter.
• Terms of trade rose 0.3% as a fall in import prices outstripped a decline in export prices.
• ANZ's export commodity price index is nearly 10% off its February peak.
• Terms of trade tipped to drop during the next year.