New Zealand terms of trade highest since June 1973, Statistics NZ says, as upward trend continues

New Zealand terms of trade highest since June 1973, Statistics NZ says, as upward trend continues

New Zealand's terms of trade have reached their highest level since June 1973. Here's the Statistics NZ press release.

Terms of trade highest since 1973 

The merchandise terms of trade rose 5.1 percent in the March 2017 quarter, reaching its highest level since June 1973, Stats NZ said today. 

Terms of trade is a measure of the purchasing power of New Zealand’s exports abroad. A 5.1 percent rise in the March quarter means New Zealand can buy 5.1 percent more imports for the same amount of exports. 

“The current high in the terms of trade is a result of a strong upwards trend in the terms of trade since 2000,” business prices manager Sarah Williams said today. 

In the March 2017 quarter, export prices rose 8.0 percent. Export dairy prices rose 18 percent, following a 14 percent rise in the December 2016 quarter. Despite these two large increases, dairy prices remain 21 percent lower than the recent high in the March 2014 quarter. 

In the March 2017 quarter, import prices rose 2.7 percent, influenced by a price rise for crude oil. Crude oil is still about half its mid-2012 price. However, since the end of 2008, import prices have fallen by about a quarter, with price falls for imported manufactured goods influenced by quality improvements. More powerful electronic goods are an example of a quality improvement. 

During the early 1970s, export commodity prices for dairy, meat, and wool began to increase, pushing the terms of trade to its highest level. However, this boom for export prices was short-lived, and New Zealand’s terms of trade fell after key export market Great Britain joined the European Economic Community, and after the first big oil crisis pushed up fuel prices sharply in late 1973.

Here's a detailed information release from Statistics NZ.

Here's what ASB's economists said.

Implications

From here, we expect the Terms of Trade to set a record high sometime over 2017. This release has no implications for our OCR view. 

Detail

The Terms of Trade (ToT) jumped 5.1% over the March quarter, beating our and market expectations.

As expected the earlier dairy export price surge accounted for much of the ToT jump. Over the quarter, dairy export prices spiked 18.0%. 

Moreover, the export price strength was broad-based. Forestry prices, for example, jumped 10.7%, while meat prices also lifted 2.6%. In addition, food and beverages prices surged 8.8%. 

From here, we expect the TOT to set a record high this year. The ToT sit just 0.3% below the record high set back in June 1973. And with export prices still very healthy over recent months, we expect it is only a matter time before a new record is set. 

Meanwhile, rising oil prices drove overall import prices up by 2.7% over the quarter. Specifically, petroleum and petroleum product prices surged 11.1% over the quarter. However, over recent months oil prices have moderated, which should flow through to flatter import prices over the June quarter.

And here's Westpac economist Michael Gordon's take.

NZ Q1 terms of trade
Terms of trade: +5.1% (Prev: +5.8%, Westpac f/c: +4.0%, market f/c: +3.9%)
Export price index: +8.0% (Prev: +4.9%)
Import price index: +2.7% (Prev: -0.8%) 

The terms of trade – the ratio of export prices to import prices – rose 5.1% in the March quarter, following a 5.8% rise in the December quarter. The terms of trade is now at its highest level since 1973, topping the most recent high reached in 2014. 

Export prices rose by 8%, led by an 18% jump in dairy prices. There was also a 6% rise in manufactured goods prices – a category that includes casein, another dairy product. There were also price gains in forestry products (+10.7%), aluminium (+6.8%) and meat (+2.6%). 

Import prices rose by 2.7%, led by an 11% rise in petroleum prices. However, prices were up across a broad range of categories, suggesting a little more imported inflation pressure than we expected over the quarter. Notwithstanding the latest increase, though, import prices have been on a downtrend for several years now.

While export prices were up, volumes were down sharply: a 4.2% drop in the March quarter, after a 5.5% drop in the previous quarter. In particular, dairy export volumes are down 19% over the last two quarters. That is well beyond the drop in milk production that we saw in the early part of the last season, and suggests that some shipments have simply been delayed (indeed, the April trade figures showed a sharp rebound in dairy export volumes). There are no implications for our March quarter GDP forecast, as lower exports are likely to be offset by higher stocks.

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

We welcome your comments below. If you are not already registered, please register to comment.

Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.

37 Comments

Comment Filter

Highlight new comments in the last hr(s).

Isn't that a good thing ?

It's a fabulous thing :)

I cannot wait! When both import and export terms increase sharply, this is a strong signal that inflation is increasing. What happens when inflation increases? Well, interest rates increase. As a saver, this warms the cockles of my heart...

I'm sure the commentators on this site will fall over each other to give the government credit. Lol

Yes especially PocketAces

I guess I would if I saw life in a one dimensional way, see Northland Hippy's comment, fleshes the whole thing out quite well

Our export earnings are less than 4 years ago. For the same period our population has grown 8% so in real terms we each have less spending power on imported goods like cars, cell phones ,computers ,heavy machinery etc.
Our tourism industry is booming thanks to cheap air fairs due to low fuel costs. This will change with the price of fuel and the degradation of our environment due to population pressure and reduced funding to DOC. The government did clean up our rivers in one night by doubling the allowable ecoli so that we can carry on with our clean green mantra.
For the average working class NZer in the land of rent, life has not improved and has become depressingly unimprovable. There used to be light at the end of the tunnel with the possible reality of purchasing a home. That dream is gone and they get increased help to pay the rent instead of higher wages.
Landlords are happy many of whom are the immigrants who purchased NZ homes which qualified there immigration requirement of investing in and starting a business. How the Maori party supported this rort in exchange for some trinkets challenges my whole belief that we have moved on from colonization.

If our TofT are so good, surely we should be experiencing an improving quaility of life here. That is we would if we were not diluting such benefits among huge numbers of newcomers as well as permitting too much of it to be sequestered by overly greedy sections of our society. I do not like using the word elites for the fools that are responsible for such major problems here.

Terms of trade are good but I had it better when NZD/USD was around $0.90. Not that I buy that much from the US right now.

produce what china wants as much as possible when it's still buying

Brilliant news, especially with the improvement being broad based across multiple product categories and given dairy is down 21%. A bit of a headache for the Labour/Green strategists to come up with some spin that will put a negative twist on it.

Oh they will find a way. Maybe Alex Tarrant could help them

The main driver is basically "weak" Oil prices. This is a big problem for the stability of the whole system.
The Oil price simply wont lift because of sluggish world growth and its caning Oil exporting countries ...
a temporary bonus for importers, but it doesnt spell good times ahead.

If it was driven by weak oil prices, why is it that the import prices are increasing? If the terms of trade were driven by decreasing import prices such as oil, I would expect that the overall import prices to be decreasing rather than increasing. The Terms of Trade increase is due to export prices increasing MORE than import prices. Both are increasing, one strongly and one modestly.

i think you missed this bit ...
"Notwithstanding the latest increase, though, import prices have been on a downtrend for several years now."

11
up

Interestingly, the year after the last time we had such good terms of trade (1974) our housing bubble exploded leading to a 40% collapse in values. It turned out that the whole machinery was a ponzi scheme fuelled by cheap oil and extraordinarily high levelso f immigration. The moment the credit dried up and the economic situation in our largest trading partners took a turn, the whole house of cards started collapsing. Soon we went through unprecedented immigration to high level of emigration. Perhaps this time will be different. Perhaps.

Absolutely priceless comment.

This reminds me of a Warren Buffett comment...
"be fearful when others are greedy and greedy when others are fearful"

.. but but but but ... this time IS different ... it really truly is ...

'Cos no one has ever called us a " Rock Star Economy " before ...

... feeling very chuffed about that , we is ... like a Rolling Stone ... Who ... were flying like the Eagles , reaching Nirvana ... until the Beatles nibbled at our debt laden wings ...huddled together in our Crowded House ... as we began to sink faster than a Led Zeppellin ...

Gummy, don't forget the The Stranglers!

https://www.youtube.com/watch?v=-W4LvJ2tdvk

or these guys off the Letterman show
https://www.youtube.com/watch?v=Un-ZrB0sFto

Gummy Bear! I see you haven't lost your edge. Long time...

Looks like fake news - Having a little difficulty with that - what location are you referring to - can't recall that happening here in NZ - are you a migrant from somewhere else?

ToT. Quite a misleading lagging indicator.
"Terms of trade, when used to help determine how healthy a country’s economy is, can lead analysts to draw the wrong conclusions. A ToT increase could pose a negative effect in that the country’s export volumes could fall and the balance of payments may worsen."
+
(from above) "While export prices were up, volumes were down sharply: a 4.2% drop in the March quarter, after a 5.5% drop in the previous quarter."
=
What?

Its a good thing , it means we already have all bought the shiny stuff we want like flat screen TV's and new cars , so we dont need to import so much of this stuff from overseas anymore .

Instead we are exporting more than we import .

There are very few countries on earth that do this

Japan has also managed this. Maybe we're following their economic path sooner than anticipated, or maybe people are struggling to borrow to consume.

I struggle to think of anything much to buy. Music costs $12 a month for as much as I want to listen to, I can get books for free from Gutenberg, watch interesting content on YouTube and other sites, and have computing devices provided by my job. I have enough clothes. The machine at work makes pretty good flat whites.

Why spend money, and on what?

It's getting like that, isn't it?

My e-reader is about 90% full of freebies from Project Gutenberg, my iPod is stuffed with more free podcasts than I have time to listen to, and most of them are more professionally produced than anything TVNZ or TV3 are managing, and if I think they're worth it I'll send a donation.

Haven't owned a TV for more than ten years.

Audible subscription, at about $14 a month, worth every penny, but for free audiobooks there's Librivox.

Isn't the actual trade defect/surplus aka balance of trade even more important in terms of the economy and providing a high quality of life to New Zealanders? graphs here
https://tradingeconomics.com/new-zealand/balance-of-trade
Hard to read the tealeaves but to me that looks like a cyclical downward trend since 2010.

Having good Terms of Trade is a very good thing. Oil price being lower has helped but oil has had a structural price change. Oil has been over priced for decades on the belief it would run out but increased oil production from Fracking/shale sands etc and the development of alternative energies ( go Elon Musk ! ) has resulted in oil future dependance falling permanently. It is also great to see the growth in the likes of the wine industry, tourism,horticulture and developing IT industry. All in all a growing base for our economy away from being totally Agriculture dependant which most people I'm sure will be happy with.Who's going to Govern us ? I think Labour has lost it's way and has a poor leader, Winnie is just a waste of space - I think a marrige of The Greens and National would be a SMART option if it could happen ......Hope so

Shoreman - "Oil has a structural price change". Nope - Oil cos and Oil countries are slowly going broke .. This is bad news for industrial civilization.
http://www.artberman.com/shale-cost-reductions-are-10-technology-and-90-...
http://www.nasdaq.com/symbol/sdrl/stock-chart?intraday=off&timeframe=10y...

"Development of alternative energies" ... almost funny - you do realise Musk loses around US$13,000 per car he sells? Its definitely an alternative way of operating. Musk is the ultimate subsidy mosquito. But given you wont believe that you might want to cast your eye over this ... hes got his work cut out for him
http://energyskeptic.com/tag/cubic-mile-of-oil/

"Development of alternative energies" ... almost funny - you do realise Musk loses around US$13,000 per car he sells?"

Normalising profit by output is an extremely naive way of framing the performance a company such as Tesla.

Not if youre actually in the business of selling cars...

Green eegs and Ham - Sure oil producing companies/countries are slowly going broke just part of the evolution, guess the huge horse breeding outfits had the same issue with the birth of the internal combustion motor cars, things change, industries have life cycles new one's emerge ! No way would I doubt the future of Tesla, Elon Musk is one of the smartest men of our time, has taken on the car manufactures, oil companies, Nasa with his rockets, reinvented the solar industry............. You appear to view change that is bad for one industry and a gain for another as a big problem just how it works things never stay the same.

Shoreman - all the previous transitions you are getting at ... manpower to horse to steam to coal to Oil etc involved increasing energy density ... ie a step up the energy foodchain. A step backwards is a myth.

If someone promotes the idea that human life might expand to mars to help solve resource problems here, Id suggest hes one of the stupidest men of our time.

Hawking thinks we need to be off the planet (or option to be off) within 100years. Musk seems to be leading the pack in actively making that a reality.

Green eggs and ham - big call ???? Time always proves things bet you'll drive a Tesla in your life - you must be a very clever man to take the high road with Elon Musk perhaps you think your smarter than everyone - love to know how successful in business your record is....