Worst could be over for trade deficit.

Higher-than-expected exports and lower-than-expected imports in April are raising hopes that the worst may be over for the trade deficit.

Exports exceeded imports by $19 million last month, Statistics New Zealand reported, where the market had expected a trade deficit of $180 million. It followed a $75 million March surplus.

They are the only two months the trade accounts have been in the black since May 2004. On an annual basis, the trade balance remains deep in the red but, at $6.9 billion, it is the first time it has been below $7 billion this year. It peaked at $7.3 billion in the year ended February.

Statistics NZ's trend measure, which strips out seasonal effects and lumpy items such as aircraft, shows exports recovering, and the monthly balance narrowing since the middle of last year.

Bank of New Zealand economist Dean Ford is not getting too excited just yet, however. "Monthly trade figures always look relatively healthy at this time of year with the agricultural export season at its peak. What's more, New Zealand's trade figures are notoriously volatile.

"Even so we can't help wondering whether the peak in the trade shortfall is indeed behind us."

It was encouraging that the deficit had not got worse when the run-up in world oil prices would still be putting pressure on import values.

"What's more, the decline in the currency from the start of the year will also be boosting the external shortfall. Given enough time, firms and households will adjust consumption of imports and production of exports to the weaker currency but, until then, only price effects will matter. And since New Zealand imports more than it exports depreciation of the dollar will put upward pressure on the trade deficit," Ford said.

In the three months ended April, exports were 6.8 per cent up on the same period last year, while imports were 4.7 per cent higher. In the previous three months, exports were flat (up 0.4 per cent) but imports were 10.7 per cent above year-earlier levels.

Since 2001, growth in imports has outstripped growth in domestic demand in the economy. It has driven a deterioration in the trade balance and the wider balance of payments.

IMF economists have analysed the increase in import penetration - how much imports satisfy domestic demand - in research published last month.

All advanced economies have experienced a rise in import penetration during the past 20 years and New Zealand's is middle of the range over that period. But the increase in import volumes between 2003 and 2005 - from 32.3 per cent to 35.7 per cent of gross national expenditure - was 2 percentage points larger than a continuation of the historic trend would account for.

In New Zealand's case, demand for imports is less responsive to rises and falls in import prices than is the case for most other developed countries.

But the magnitude of the exchange rate's rise and the corresponding fall in import prices suggests the currency was a large influence and that there was a large cyclical element to the rise in import penetration.

Part of the fall in import prices could be structural, the IMF economists suggest, due, for example, to the impact of China on the global price of manufactured goods. "Nonetheless, the bulk of the decline appears to reflect the appreciation of the New Zealand dollar in 2002-2005."

They conclude the rise in import penetration in that period was about two parts cyclical to one part structural. And they expect that as the economy cools and the exchange rate falls import penetration will flatten off - still rising but more in line with its long-term trend.

They note that one of the drivers of increased import penetration has been a surge in imports of plant and machinery.

In the three months ended April, imports of capital goods were $1.8 billion, 12.5 per cent higher than in the same period last year.

The report

* Exports in April were $3.02 billion.

* This outstripped imports of $3 billion.

* But the trade gap for the year was still $6.9 billion.