Trade road looks tougher ahead

By Brian Fallow

WELLINGTON - It got harder for New Zealand to earn its living as a trading nation in the first three months of 1999 - and economists expect the squeeze to get worse before it gets better.

The terms of trade index fell 2.1 per cent, which means 2.1 per cent less of imports could be funded by a fixed quantity of New Zealand's exports.

The terms of trade have been declining since mid-1993 and are now at their lowest point since September 1987.

The latest deterioration reflects the fact that export prices fell 2.6 per cent while import prices fell 0.4 per cent.

The fall in export prices was across the board, apart from fish and forest products. Dairy prices fell 5.6 per cent, on top of a 2.1 per cent fall the quarter before.

These falls outweighed an increase in export volumes, which was smaller than in the previous two quarters but sufficient to restore export volumes to just (1 per cent) above levels a year ago.

Dairy product volumes were a seasonally adjusted 2.2 per cent higher, but the drought has taken a toll on meat and wool exports, down 5.7 and 14.2 per cent respectively.

While import prices fell 0.4 per cent, all of that and more is accounted for by a 13.5 per cent fall in crude oil prices, Deutsche Bank chief economist Ulf Schoefisch said.

"Everything else increased by 0.3 or 0.4 per cent."

Because of the time it takes for oil to reach New Zealand from the Gulf, the March-quarter numbers reflect the fall in world oil prices in December last year. Since then oil prices have rebounded about 30 per cent.

Bank of New Zealand economist Peter Jolly said: "As that spike in oil prices feeds through, while export prices remain flat or fall, the terms of trade will deteriorate again in the June quarter and probably by more than they just have."

Export figures for April, also out yesterday, confirmed estimates that the annual trade deficit, which has been worsening for the past seven months, is now the widest it has been since January 1985.

Dairy, meat, wool and paper exports were all down from April 1998, while wood, fish, horticultural and aluminium exports were up.

Mr Jolly said the figures reinforced the dual nature of the economy at present. "We have a better-performing internal economy, but there is a huge drag on growth from the external side."

For calendar 1999 the BNZ forecasts that the internal economy will grow 4.1 per cent, but net exports will subtract 1.3 per cent from that, to give overall GDP growth of 2.8 per cent.

* Economic think-tank Berl sees the kiwi dollar declining over the next six to nine months, assisting a moderate upswing in gross domestic product to 2.2 per cent in the March 2000 year.

In a commentary on its latest quarterly economic assessment, Berl said the kiwi would fall on a trade-weighted basis from a June-quarter average of 59.6 to 54.6.