Oil price cut lifts terms of trade

Import prices fell even more than export prices. Photo / Brett Phibbs

Pattern with New Zealand’s largest trading partners tells rather different story

New Zealand's terms of trade improved 1.5 per cent in the March quarter but only because of the lagged effects of lower oil prices.

Export prices fell 3.7 per cent in the March quarter. They have declined for five of the past six quarters. The fall was led by dairy prices, down 6.3 per cent last quarter to be nearly a third lower than a year earlier.

But import prices fell even more than export prices, 5.1 per cent, dominated by a 29 per cent fall in oil prices.

Global oil prices troughed in January and have since rebounded by nearly 40 per cent, but there is a lag between prices on the commodity markets and the contract prices for goods crossing New Zealand's wharves, which the terms of trade data reflect.

Excluding oil, import prices rose 0.1 per cent in the March quarter.

The extent to which the drop in oil prices flattered the latest terms of trade result is evident when the terms of trade with New Zealand's largest trading partners is considered. Where it rose overall by 1.5 per cent in the March quarter it was down 4.4 per cent in the case of trade with China, down 7.7 per cent with Australia and 3.3 per cent with the United States.

The quarter's 6.3 per cent fall in export dairy prices was compounded by lower volumes so that the value of dairy exports fell 9.7 per cent.

Meat prices fell 4.5 per cent but that was from a record high in the December quarter and meat prices were still at their second highest level since this data series began 25 years ago. The latest decline in meat prices was offset by a 4.6 per cent rise in volumes.

"This bounce in the terms of trade is likely to be reversed in the next couple of quarters, given that world oil prices have risen from their lows while dairy export prices have seen renewed declines," said Westpac economist Michael Gordon.

"But even so, we believe that the current downturn in the terms of trade is nearing its end point. If we're right, the trough in this cycle is still likely to be higher than the previous peak seen in 2011."

The Treasury takes a similar view.

One of the key assumptions underpinning last month's Budget is that the terms of trade will not retreat far from the 40-year high recorded a year ago (it is 5.4 per cent off its peak now).

The Reserve Bank and the Bank of New Zealand expect the terms of trade to drop around 8 per cent from the 40-year peak last year.

Forecasters are confident, in short, that the world has changed in New Zealand's favour inasmuch as the relative prices of the kinds of things the country exports and imports are concerned, and that most of the marked uptrend since the turn of the century will stick.

But the Treasury has also done the sums on the outlook if the terms of trade were to revert to its average level over the past 20 years (a period which includes the 15-year uptrend which followed the flatlining of the 1980s and 1990s).

In that case budget surpluses evaporate from the forecasts and are replaced by structural deficits close to 2 per cent of GDP.

The uptrend in the terms of trade is not just a reflection of relative commodity prices, however.

Statistics New Zealand's series for capital goods, excluding transport, show that quality-adjusted prices for imported industrial plant and machinery have fallen by more than two-thirds since the early 2000s, while the volume of such imports has almost quintupled.