Terms of trade at new 40-year high

Export volumes rose 9.7 per cent, led by a 23 per cent gain in dairy products in final three months of 2013, according to Statistics New Zealand.

New Zealand's terms of trade rose to a 40-year high for the second straight quarter in the final three months of 2013 as import prices fell more than export prices. On a volume measure, dairy products led exports higher while imports were unchanged.

Terms of trade, which measures the quantity of imports the country can buy with a set amount of exports, gained 2.3 per cent in the fourth quarter to the highest level since December 1973, according to Statistics New Zealand. It would need to climb another 3.5 per cent to match the all-time high recorded in the June quarter of 1973.

The sky-high terms of trade will provide a key pillar of support to stronger growth in the New Zealand economy this year.

Westpac senior economist, Anne Boniface

The kiwi dollar recently traded at 83.73 US cents, up from 83.58 cents immediately before the figures were released at 10:45am. The gain in terms of trade exceeded the 2 per cent forecast in a Reuters survey.

Export prices fell 0.5 per cent, against expectations of a 1 per cent gain, while import prices declined 2.8 per cent versus a forecast 1 per cent decline. That follows an 8.9 per cent gain in export prices in the third quarter, led by a surge in milk powder and butter, and gains for forestry and meat.

Dairy export prices fell 1.1 per cent in the fourth quarter, the only decline recorded in 2013, while forestry dropped 2.1 per cent. Wool prices rose 8.7 per cent and meat was up 0.2 per cent.

Export volumes rose 9.7 per cent, led by a 23 per cent gain in dairy products, helping lift the actual value of dairy exports by 27 per cent even as prices fell. Meat volumes climbed 5.5 per cent, while petroleum products fell 24 per cent and forestry volumes were down 0.5 per cent. Import volume were unchanged as a 7.8 per cent decline for capital goods was offset by a 75 per cent jump in petrol and gas volumes, a 2.1 per cent gain for intermediate goods and consumption goods, and a 6.2 per cent increase in cars.

The decline in import prices was led by a 3.8 per cent drop in mechanical machinery, a 3.7 per cent fall for chemicals and a 5.2 per cent decline for electrical machinery, with some of the drop attributable to a strong New Zealand dollar, the government statistician said.

"While we don't think the terms of trade can continue to head north forever, we do suspect a good chunk of the recent strength in the terms of trade reflects structural changes in the drivers of New Zealand's key exports - in particular, increased demand for New Zealand's commodity exports from China and other emerging economies," said Westpac's Anne Boniface

The terms of trade for services such as tourism rose 1.5 per cent, with a 0.2 per cent gain in services export prices and a 1.3 per cent decline for imports.