NZ terms of trade up 5.7 per cent in December quarter

New Zealand's terms of trade rose an unexpectedly strong 5.7 per cent in the December quarter, says Stats NZ.

A 5.7 per cent surge in New Zealand's terms of trade in the December quarter, as import prices fell much further than export prices, is seen as more evidence that the recovery is rebalancing towards production.

The increase in the terms of trade was the largest since 1976 and followed six consecutive quarterly falls, Statistics New Zealand (SNZ) said today.

For the year to December, the terms of trade, which measure the amount of imports a fixed amount of exports will purchase, fell 8.3 per cent.

SNZ said a rising New Zealand dollar in the latest quarter had a downward influence on both export and import prices.

Import prices fell 5.8 per cent in the quarter, while export prices fell 0.3 per cent. Seasonally adjusted export volumes fell 1.2 per cent from the previous quarter, the first fall since the September 2008 quarter. Import volumes rose 1.6 per cent.

Goldman Sachs JBWere economist Philip Borkin said that while it was early days, if current trends continued it would help correct some of the country's lingering large external imbalances.

He took some encouragement from economic developments showing sluggish cyclical momentum, such as in housing and retailing, alongside improving external sector news such as global growth, commodity prices, and a fall in the New Zealand dollar against its Australian counterpart.

While imports were expected to rise from current depressed levels as inventories were rebuilt, a sluggish domestic recovery hardly portended a strong pick-up. At the same time exports should benefit from improving prospects offshore, said Borkin.

"This foreshadows an ongoing economic rebalancing the economy sorely needs."

Recent movements in soft commodity prices suggested further gains in the terms of trade were likely in coming quarters.

"Favourable supply-demand fundamentals also leave us confident NZ's terms of trade can push higher beyond this," Borkin said.

"In our view this represents a purchasing power windfall for the economy, and is a positive medium term story."

But ASB economists said that after some improvement in the import price index, as today's data did not fully capture a lift in dairy prices in late 2009, they expected the terms of trade to track sideways.

During the past year the trade balance and current account balance had narrowed on the back of weak import demand and robust agricultural export volumes.

Today's data pointed to early signs of that trend reversing, in particular a lift in capital goods import volumes was encouraging, they said.

"As the economic recovery gains momentum, we expect import demand to improve and for the trade balance to begin widening over 2010."

ANZ said the terms of trade figures were further confirmation that the rebalancing of the economy towards the productive sector was under way.

The lift in import volumes was partly due to weak demand for imports earlier last year, while the 8.2 per cent rise in capital goods import volumes boded well for improving business investment, a necessary condition for the sustainability of the current expansion.

SNZ said the 5.8 per cent fall in prices of imported goods was primarily driven by an 8.6 per cent drop in mechanical machinery and a 10 per cent fall in electrical machinery and apparatus prices.

Key factors in the 0.3 per cent fall in prices of exported goods included an 8.3 per cent drop in meat prices, the largest quarterly fall in five years. Fish and fish preparations export prices fell 8.2 per cent in the latest quarter, while dairy product export prices rose 5 per cent.

An 18.3 per cent fall in petroleum and petroleum product export volumes was a key factor in the 1.2 per cent fall in export volumes in the December quarter.

Dairy product export volumes also fell, down 4 per cent, with fruit and vegetable volumes down 14.9 per cent, although meat export volumes rose 12.3 per cent.

Along with the rise in capital goods import volumes, a 32.2 per cent increase in car volumes contributed to the rise in import volumes.

- NZPA