Sharp drop in NZ terms of trade, further falls likely

By NZPA

Thursday 12th September 2002

A sharp drop in the prices New Zealand achieved for its exports in the three months ended June is likely to be followed by further falls this year.

The rising New Zealand dollar in the June quarter contributed to the biggest fall in the country's terms of trade for more than 12 years, Statistics New Zealand said today.

The merchandise terms of trade index, which measures the amount of imports that can be funded by a fixed quantity of exports, fell 4.5 percent in the three months to June. That followed a rise of 1.5 percent in the March quarter.

Prices for merchandise exports fell by 5.9 percent in the quarter -- the biggest drop in 44 years -- while prices for imports fell 1.4 percent.

Westpac economist Nick Tuffley said the causes of the fall -- weaker commodity prices, a 5.8 percent rise in the New Zealand dollar, and higher oil prices -- were not a surprise. However, the extent of the slide was unexpected.

"The ANZ Commodity Price Index in world price terms has fallen about 4 percent so far this year ... indicating that your overall commodity basket overall wasn't going to fall that severely, because it wasn't just the dairy prices, meat prices were down considerably as well," Mr Tuffley said.

He picked a slightly more stable terms of trade for the next quarter, with world commodity prices stabilising and the New Zealand dollar not as volatile.

Oil prices added about 1.4 percent to import prices, which would otherwise have fallen about 2.8 percent.

Today's figures were likely to further restrain the Reserve Bank from raising interest rates when it meets on October 2. The Official Cash Rate is currently 5.75 percent.

"It just confirms you will get a slight taming effect on inflation, through your imported costs and prices, such as meat prices which have already demonstrated that they are coming down slightly now the international returns are peeling off," Mr Tuffley said.

"We're going to have to start exporting more to import the same amount of goods, it's like we're have a slight income drag on us going ahead."

ANZ Bank economists said in a commentary that while an increase in the volume of imports (up 3.5 percent) would be a negative factor in the June quarter gross domestic product, the composition of the imports was positive for local production.

"Indeed, increases were recorded in capital goods and intermediate goods (with the exception of fuels and lubricants). Furthermore, imports of consumer goods were up sharply, consistent with ongoing strength in retail spending," the ANZ Bank said.

Imports of intermediate goods volumes such as crude oil were up 5.1 percent during the quarter, while consumption goods, such as consumer durables, rose 5.5 percent.

"On the face of it, the weakness in export and import prices should provide some comfort on the inflation front. However, very strong local trading conditions ... raise question marks over how much will be passed through into lower consumer prices."

ANZ warned that firms could be tempted to use the lower import costs to rebuild margins.

Deutsche Bank senior economist Darren Gibbs said the bank's indicators suggested official export prices still did not fully reflect the decline in spot export prices and the rise in the New Zealand dollar.

He expected further falls in the terms of trade, possibly back to levels seen in the late 1990s.

Statistics NZ said price falls for exports were widespread, with the greatest impact from dairy prices dropping 16.7 percent, and meat down 4.6 percent.

While prices for most imports also fell, there were rises in petroleum and petroleum products, and for cars.

Seasonally adjusted, the volumes for exports rose by 4.8 percent in the June quarter -- the largest quarterly rise since the September 1999 quarter -- following on from a 1.6 percent rise in March.

Volume rises were recorded in forestry products (up 19.6 percent), dairy products (up 13 percent) and meat (up 7.1 percent). Fish and fish preparations were the only exports to fall in volume.

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