Former Economics Editor of the NZ Herald

Terms of trade get ugly as exports slide

Photo / APN
Photo / APN

National income took a hit in the first three months of the year as export prices fell faster than import prices.

The terms of trade, which measures the changing volume of goods imports that can be funded by a fixed volume of New Zealand's exports, has been falling since it hit a 37-year high in the June quarter.

The decline accelerated to 2.3 per cent in the March quarter, bringing the terms of trade back to where it was nearly two years ago and 4.3 per cent off its peak from last year.

It is still about 10 per cent above its average level over the past 10 years.

But Goldman Sachs economist Philip Borkin said: "While the level of the terms of trade is important, as it is effectively a gauge of purchasing power, and it is expected to remain elevated relative to history, it is the change that is a key determining factor for national income growth."

Strong national income growth, particularly in the agricultural sector, had made the process of deleveraging less painful, Borkin said, but he expects it to contract through most of this year.

A rise in the exchange rate during the March quarter reduced export and import prices in New Zealand dollar terms, but the 3.8 per cent fall in export prices outstripped a 1.5 per cent fall in import prices.

Dairy prices were the biggest contributor to lower export prices, falling 5.6 per cent to a two-year low.

Fruit prices fell 7.3 per cent, forest products 4.2 per cent, meat 3.6 per cent and wool 10.1 per cent.

On the import side, transport equipment prices fell 2.3 per cent, mechanical machinery 1.8 per cent and electrical machinery 2.6 per cent. Oil prices were flat.

ASB economist Jane Turner expects world prices for dairy products and meat to continue to ease back from the extremely high levels reached last year.

"Falling export prices mean the export sector will be providing less support for the economic recovery over 2012 compared with 2011," she said.

Compounding the adverse change in relative prices, volumes of exports eased 0.6 per cent in the quarter while imports climbed 5.4 per cent.

Imports of oil and refined products accounted for much of the increase. They can impart some volatility to the import numbers.

But even when they were excluded, import volumes were up 1.8 per cent on the December quarter.

New Zealand also exports oil, but 19 per cent less in the March quarter, on top of a 9 per cent fall in the December quarter.

Oil exports have been on a declining trend, in line with falling production from the Tui field.

Dairy export volumes rose 3.6 per cent, the third quarter in a row to record an increase in volumes, offsetting three consecutive quarters of falling dairy prices.

Meat exports rose 1.1 per cent but that followed falls of 4.6 and 6.5 per cent in the preceding quarters.

Fruit export volumes fell 21 per cent.

Turner said the quarter's 2.2 per cent rise in imports of capital goods, excluding transport equipment, was an encouraging sign of continuing investment demand in the economy.

Weaker kiwi helps export commodities

A weaker kiwi dollar took the sting out of a further drop in world prices for New Zealand's export commodities last month.

ANZ's commodity price index dropped 4.2 per cent, its 12th decline in the past 13 months.

The index has fallen 18 per cent from its peak a year ago and is back to a 21-month low. But the currency fell slightly more, so that in New Zealand dollar terms the index was up for the month, albeit only 0.8 per cent above the two and a half year low it hit in April.

Wool recorded the largest decline, 11 per cent to the lowest level since September 2010, ANZ economist Steve Edwards said.

Dairy products, which make up 43 per cent of the index, fell 8 per cent to be 28 per cent off their peak in March last year. Sheepmeat prices fell 6 per cent, while beef, pelts and aluminium all fell 2 per cent. But apple prices rose 12 per cent as the new season's Braeburns reached Northern Hemisphere markets, Edwards said.

"Likewise kiwifruit prices lifted 7 per cent as its export season got under way."

- NZ Herald

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