ASB QuickView: June Trade Balance

NZPA

Tuesday 26th July 2011

Key Stats
Trade Balance +$230m (June month, market expectations +$400m)
$1.02 billion (year to June 2011)

Quarterly Seasonally Adjusted
Trade Balance +$362 million
Exports +4.5% qoq
Imports -1% qoq

Comment
Exports surged 4.5% over Q2 (seasonally adjusted), building further on strong growth recorded over the previous 2 quarters.
• The lift over the quarter was underpinned by stronger exports of dairy and meat, largely due to stronger prices.
• Exports of manufactured goods also expanded strongly, with exports of mechanical machinery and equipment up 7.7% and exports of electrical machinery and equipment up 9%. With Australia being a key export market for manufactured goods, strong growth in the manufactured exports has been supported by the low NZD relative to the AUD.
• Exports of logs started to ease back over Q2, following a surge in Q1. Anecdotally demand from China has eased over recent months, which could weigh on forestry exports over H2 2011.

Imports
Imports fell 1% over the quarter, with declines led by capital and transport goods as well as motor vehicles.
• The large decline in transport goods reflects the bulky nature of aircraft imports. AirNZ is currently upgrading its fleet, with the import of 3 Boeing 777 aircraft over Q4 2010 and Q1 2011 providing a temporary boost to imports, which was unwound over Q2.
• Meanwhile, the 2.5% decline in plant and machinery imports may largely be a price effect, rather than reduced investment demand, given the NZD averaged around 5.7% higher against the USD over Q2 compared to the previous quarter. The Overseas Trade Indices, released in late August, will provide better insight into import volume and price splits.
• Imports of passenger cars fell 8%, following a 4% decline in the previous quarter. Car imports had been starting to slow over the early months of 2011, reflecting tight supply in the Japanese second-hand car market. These supply issues have become exacerbated by the impact of the earthquake, tsunami and nuclear crisis in Japan in early March. Production of new cars in Japan remains disrupted due to electricity shortages, and this is likely to have flow-on effects to the supply of second-hand cars in the Japanese market.

Implications
Strong export commodity prices were a key feature in underpinning the trade surplus over Q2. More recently, dairy prices have been easing over recent months and the appreciation in the NZD has further reduced prices in NZD terms.

Meanwhile, the recent lift in the NZD/AUD will take the edge off the strong competitiveness of the NZ manufacturing sector in the Australian market. Also concerning are anecdotes of slowing demand in China, particularly for raw commodities such as forestry. NZ's economic recovery has been supported by stronger export incomes over the first half of 2011.

However, there are concerns that support for export incomes may wane over the second half of the year, as commodity prices moderate from elevated levels and global growth goes through a soft patch. We believe these uncertainties will see the RBNZ holding off increasing the OCR until December 2011, by which time the domestic economy will have had more time to recover.

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