Terms of trade bite $2.4b from income

By JIM EAGLES

The decline in the terms of trade over the past year cost New Zealand the equivalent of $2.4 billion in national income or 2 per cent of GDP.

Deutsche Bank made the calculation based on Statistics NZ's overseas trade indexes for the final quarter of last year, out yesterday.

The figures showed that official terms of trade have deteriorated far faster than expected, meaning New Zealand must export more to pay for the same quantity of imports.

Terms of trade fell 2.8 per cent in the December quarter - the market expectation had been for virtually no change - on top of falls of 4.7 per cent in the June quarter and 1.8 per cent in the September quarter.

Deutsche Bank senior economist Darren Gibbs said the official terms of trade had now fallen by 7.7 per cent over the past year to levels last seen midway through 2000.

"Relative to 2001," he said, "this is equivalent to a loss of national income of the order of $2.4 billion or 2 per cent of GDP."

The fall in the terms of trade in the December quarter was mainly driven by declining export prices, which fell 5.3 per cent, primarily due to a 4.7 per cent increase in the trade-weighted value of the New Zealand dollar.

But the adverse trend was exacerbated by a much smaller than expected drop in the price of imports, down only 2.6 per cent, partly because the exchange rate used for them was up only 2.8 per cent.

Offsetting the adverse terms of trade was a solid increase in export volumes which on a seasonally adjusted basis rose by 2.2 per cent in the quarter.

That carried export growth during the year to 8.5 per cent, the highest level for 2 1/2 years, largely due to the remarkable performance of the dairy industry.

Unfortunately, noted Stephen Toplis, head of market economics with the BNZ, that good export performance was overshadowed by the adverse movement in the terms of trade.

Toplis said the "sheer hammering of local incomes via the terms of trade" was a further reason to be cautious about growth prospects in the year ahead.

"This has every potential to impact adversely - and perhaps with a lag - on such things as business investment, employment and consumer spending, especially from the farming sector."

The substantial weakness in the terms of trade confirmed by the latest figures, "and little prospect of improvement for the near term, very much aligns with the idea that New Zealand growth is set to slow," he concluded.

"As soon as this is indicated by the data, the Reserve Bank will scratch its itch to ease."