New Zealand’s terms of trades fell for a second quarter in the final three months of 2011 as export prices rose less than the price of imports in the face of a weakening New Zealand dollar.
The terms of trade fell 1.4 percent in the fourth quarter, adding to a 0.6 percent decline three months earlier, according to Statistics New Zealand. A decline of 1.9 percent was forecast for the latest period, according to a Reuters survey.
Prices for exported goods rose 1.7 percent, led by gains in meat and fruit and a decline in dairy, while import prices rose 3.2 percent led by fuel, machinery, transport equipment and food and beverages.
The terms of trade, which measures the amount of imports that can be funded by a fixed quantity of exports, rose to a 37 year high in the second quarter, driven by gains in export prices of dairy products, petrol products, meat and wool.
The decline in the terms of trade in the latest three months came as the nation recorded record fourth-quarter volumes of total exports and seasonally adjusted dairy shipments. The 2.9 percent gain in exports was driven by dairy products such as milk powder, the government statistician said. Import volumes fell 2.1 percent, seasonally adjusted.
“While the terms of trade remains high, we believe it has peaked for now and will moderate further over the course of 2012,” said Philip Borkin, economist at Goldman Sachs. “This will weigh on national income growth. Net exports should make a positive contribution to 4Q11 GDP growth, at least partly offsetting an expected run-down in inventories built up over 3Q11.”
Among exports, prices of meat rose 3.4 percent, fruit gained 9.6 percent and dairy prices declined 1.1 percent. Prices of imported petroleum climbed 3.9 percent, mechanical machinery rose 3.7 percent, transport equipment gained 3.2 percent and food and beverages rose 3.3 percent.
BNZ Head of Research Stephen Toplis said the data was an early sign of the cracks developing in New Zealand's external accounts.
"The prospect of deterioration in the external situation poses the very real risk of a downward pressure on the NZD and upward pressure on domestic interest rates," he said.
Here's more from Toplis:
Export prices may have risen strongly over Q4 but that growth has been overtaken by an even stronger push higher in import prices. As a consequence, New Zealand's terms of trade actually fell 1.4% across the quarter. Not only was this the largest quarterly drop since Q3 2009 but it was the second consecutive decline. Alas, we believe this is the start of things to come.
Already, New Zealand commodity prices, as measured by the ANZ's Commodity Price Index, have fallen 14.0% from their March 11 peak. We believe further falls are likely. In particular, a sharp drop in meat, especially lamb, prices is forecast.
The pressure on the current account balance should be watched closely by all and sundry. The immediate concern is the reduction in the effective purchasing power of New Zealanders, that a decline in the terms of trade implies, but later on down the track a serious increase in the current account imbalance could well set off the trigger finger of the rating agencies who are already expressing concern about the state of New Zealand's external imbalances. This concern would be further heightened if the Government fails to return its books to surplus as it too would then be adding to the external position's woes.
From a financial market perspective, deterioration in the external situation poses the very real risk of a combination of downward pressure on the NZD and interest rates higher than they would otherwise need to be.