New Zealand's terms of trade fell to a three-year low in the September quarter as the country's strong currency ate into returns from an increasing volume of dairy exports.
The terms of trade, which measures how much imports can be bought with a fixed quantity of exports, fell 3.2 per cent in the three months ended September 30, according to Statistics New Zealand. That's more than the 1.8 per cent forecast in a Reuters survey of economists. Export prices sank 6.3 per cent, ahead of the 3.6 per cent expected, while import prices declined 3.3 per cent versus an anticipated 2 per cent fall.
The falling prices came even as export volumes beat expectations, rising 9.7 per cent in the quarter, while import volumes advanced 0.7 per cent.
Dairy, which accounts for about a quarter of New Zealand's exports, was the biggest contributor to the falling export prices and rising volumes, with volumes surging 32 per cent in the quarter, even as prices sank 13 per cent.
"Dairy export volumes are at record levels, after adjusting for seasonal effects," prices manager Chris Pike said in a statement. "Dairy values remain at high levels, even though export prices have fallen for five consecutive quarters."
The New Zealand dollar held back export prices, rising 2 per cent on a trade-weighted basis in the quarter, Statistics NZ said. The kiwi recently traded at 82.02 US cents and was at 73.41 on a trade-weighted basis.
Today's figures are the latest in a string of official releases showing New Zealand's economic recovery may have slowed in the second half of the year, and come ahead of the Reserve Bank's monetary policy review on Thursday. Governor Graeme Wheeler is expected to keep the official cash rate at 2.5 per cent in what is a benign inflation environment.
The terms of trade in the services sector was unchanged in the quarter, with export and import prices both falling 0.7 per cent. The fall in export services was driven by lower prices for air transport, while the decline in imports was influenced by cheaper sea transport.
Import prices for petrol and related products shrank 13 per cent in the quarter, the sharpest decline across the industries.
ANZ economist Mark Smith said a recent turnaround in New Zealand commodity export prices would take a while to filter through into producer incomes.
The high dollar provided "a major obstacle to boosting export sector incomes and rebalancing the economy", he said.
ASB economist Jane Turner said the terms of trade, which represent New Zealand's purchasing power with the rest of the world, had gradually declined over the past 18 months and were now 10 per cent below the June 2011 peak.
"This represents slower income growth over the past year, and highlights the more challenging export conditions," she said.
"Nonetheless, despite the decline over the past year, NZ's Terms of Trade remain at elevated levels (particularly compared to the past 20 years), and are one factor underpinning the relatively elevated NZD.
"Going forward we expect the Terms of Trade to lift over 2013 - this will be underpinned by a recovery in dairy and meat export prices, reflecting higher global feed prices and the resulting impact on global production of meat and dairy over the coming year or so."