Steeper road ahead for economy

It got a little harder in the September quarter for New Zealand to earn a living as a trading nation.

Statistics New Zealand reported the terms of trade - the ratio of export to import prices - fell 0.6 per cent, after a 1.2 per cent fall in the June quarter.

The latest decline means that a fixed quantity of exports would buy 0.6 per cent less in imports than it would have in the June quarter.

"The main message is that the offset that strong commodity prices, and the terms of trade, have provided against the strength of the exchange rate is being gradually removed," said UBS chief economist Robin Clements "This will expose more exporters to currency pressure, especially as most hedges have now ended."

Export prices rose 1.9 per cent, led by dairy and meat prices. But most of the increase, 1.5 percentage points, reflected a weaker New Zealand dollar. Since then the dollar has appreciated, recently reaching a post-float high on a trade-weighted basis.

In any case, import prices in the September quarter rose faster than export prices, led by a 12 per cent rise in the cost of oil - which has since eased.

ANZ National Bank chief economist John McDermott said a structural improvement in terms of trade, as manufactured goods had become the new commodities, was being eroded by a structural rise in oil prices.

"While soft commodities look stretched cyclically, they also appear to have moved to a higher plane. On this basis, we expect the terms of trade to remain at an elevated level relative to the past decade," he said.

The terms of trade are still 0.8 per cent higher than a year ago, but that compares with a 7.2 per cent rise in the year to September 2004.

Meanwhile, export volumes fell 2.8 per cent in the September quarter on top of a 0.9 per cent fall during the previous three months, led by a 9.9 per cent fall in dairy exports. Fish exports were also lower in volume terms, but meat was up 3.6 per cent and forest products little-changed.

Imports, on the other hand, rose in real terms, led by an 11.7 per cent increase in imports of capital goods. Imports of consumer goods fell 1.3 per cent following a 12 per cent rise over the three preceding quarters.

The Reserve Bank last week forecast growth in export volumes to dwindle to 1.25 per cent in the year to next March, down from 3.8 per cent the year before. Imports are expect to grow 8.5 per cent.

The bank said manufactured exports were suffering from the effects of the high exchange rate, while growth in agricultural exports was the weakest it had been in a decade.

IMPORTS V EXPORTS

* One of the propellants of the boom, the terms of trade, is losing some of its potency.

* That is, how many cars or DVD players you can get for a containerload of milk powder.

* Export prices still rose in the September quarter, helped by a weaker dollar, but import prices rose faster.

* In volume terms, exports sagged, but imports continued to grow briskly.