Top 10 charts for 2010 with BNZ: The mystery of how NZ's terms of trade improved dramatically, but our GDP and wealth didn't

Top 10 charts for 2010 with BNZ: The mystery of how NZ's terms of trade improved dramatically, but our GDP and wealth didn't

Bernard Hickey details the eighth in our series of the Top 10 charts for 2010 in association with Bank of New Zealand.

This chart below from the Reserve Bank's December quarter Monetary Policy Statement shows New Zealand's terms of trade for goods since 2000 and how it has trended up by as much as 40% over the last decade.

The Terms of Trade is a measure of the prices of New Zealand's exports in terms of the prices of New Zealand's imports.

Prices of our major commodities such as dairy and meat products have improved significantly, in particular in the last year as demand for protein from the fast growing Asian market boosts demand at the same time as supply has been constrained by higher oil prices (a proxy for feed costs in feed lot farming) and adverse weather events.

Also, the costs of many of our imported goods, such as electronics and various manufactured goods, have fallen as supplies expanded in the wake of new capacity additions from new factories in those same Asian markets. The Reserve Bank thinks this sharp improvement in the last year may not last and is expecting a drop.

The terms of trade effectively measures how much a certain volume of goods exported can buy in terms of volumes of imports.

When a country's terms of trade improve it should indicate that country has effectively become richer.

So why hasn't New Zealand gotten richer?

GDP per capita at the end of 2010 was actually lower than it was in 2004. We have gone backwards despite this exporting windfall.

Also, our net international investment position, which includes our debts and assets both here and overseas, has deteriorated over that period from being a deficit of around 75% of GDP to a deficit of around 85% of GDP.

Why can't we improve our per capital income and national wealth when we have just experienced the best terms of trade improvement in at least a generation?

I don't have an obvious answer.

Here's a few ideas.

The terms of trade measures the prices of our exports and imports of goods. It doesn't measure the price of services. We 'export' a lot of tourism and import quite a lot of financial services.

Perhaps the relative prices of these have gone against us?

Perhaps, also, the prices of our exports may have improved but we may not have improved the volumes much, while at the same time we have increased our volumes of imports?

Or perhaps, the profits from our exporting windfall have been repatriated in the forms of dividends and interest payments from foreign owned assets or foreign owned debt?

Or maybe we simply imported far more than we exported, regardless of the prices, thanks in part to a credit fueled spending spree.

It is certainly a conundrum.

I welcome your thoughts.

Here's the chart in full close up action to chew over.

 

 

 

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?

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Bernard - I know the blog is part of your business –  but stop joining the crowd - going around a circle.

Bernard - I recommend you read my and others aricles and tell our politicians and the NZmedia. With the implementation of these ideas, we have the right answers to solve the problems out of recession - for a better economy - a better nation.

 

Walter, Bernard is just putting up the facts. They suggest that we actually do have a thriving export industry. What we now need is the govt to support it by not living beyond its means.

Bernard....   Maybe we have simply been spending more than we earn... for far too long.

http://www.rbnz.govt.nz/keygraphs/Fig6.html

The last time NZ was a NET SAVER ... ( current acct surplus ) was in 1973.

Every extra dollar of debt makes the hole deeper and deeper... 

The other thing is to know the composition of GDP...  I think agriculture represents 12-15% of GDP BUT over 40% of exports.

Most of our GDP comes from "services"

SO... u can see that it is going to take a lot of exporting to make a difference to per capita incomes.....  let alone GDP

By jove Bernard , give that man a cigar ! ........ I think you've nailed it , Roelof . NZ has not paid it's way in the world for 38 years ...................... Ye-ouch !

............ and even the Gummster can't blame just Labour for that ! The Nat rats have continued the merry dance of debt too .

Good points Roelof.

cheers

Bernard

Irrelevant, Roelof! According to two bank economists quoted in the Sunday Star today, New Zealanders are going to start borrowing and spending, again. So our GDP is going to improve and the economy , and property prices ( that quote chipped in by one, Olly Newland!) are about to head up again. So it's 'business as usual'.' If it's worked for the last 38 years, why will it not work for another? ( To be read with sarcastic overtones, and an answer not required...)

@ Bernard Hickey

Roelof says "The last time NZ had a current acct surplus was in 1973". Bernard Hickey claps. Bernard .. note that date and then go back and look at your article on the cost of the BB generation. You should now revise it. It seems the GenX's and GenY's have already had their cake, creating them, nurturing them, educating them. They have been a drain on society. It's about time they tipped something back in the tin.

 

I believe the problem lies with the flaws in the Global Monetary system.

Traditional economic theory expected that imbalances in trade would be balanced by movements in a countries exchange rates.

Since the failure of Bretton Woods in 1971, when Nixon took the dollar off gold, trade imbalances and current Acct. deficits have become the norm.

SO...  we operate in a Global world with a structurally flawed Global Monetary system. 

Current acct deficits donot matter... ( yeah right ! )

The way Japan, China and USA have created vast amounts of money and credit, over the years, has had a profound impact on the fortunes of NZ...  They given rise to the "carry trade", and the phenomenon of Global Capital Flows resulting in exchange rate movements that seem to defy the "laws of gravity" ..( to use a metaphor)

I don't really think we can blame generation ..A,B,C... or X.

The fault lies with Political leaders and economists, who for 30 yrs have said Current Acct. deficits don't  matter, and that there are no problems with the Global Monetary system.

 

 

"Whom the gods would destroy, they first make mad"...  from a Greek play descibing a characters descent ,and their awareness of this descent as it occurs, into self destructiveness ...

Sounds like the New Zealand political and economic landscape, to me.....

The graph makes a good point, just like a person who gets a better job earning more, but then starts to go and spend more, so does NZ as a whole.

So when you are spending too much in the first place, you aren't really much better off if any.

An uncle went to an accountant , many years ago , unable to cope with the increasing complexities of his farm's tax returns ....... The accountant checked the books , and asked uncle why he had embarked upon such an austerity drive , why didn't he spend up big , have some fun ..........

.......... Uncle was gobsmacked , 'cos that was no austerity plan , he and auntie always lived like that ........

.............. We were gobsmacked too , 'cos we owned a farm across the road , and we thought that uncle and auntie were living a lavish lifestyle..............

Thank God for experts , such as that accountant , to show us the errors of our ways , and to re-direct us onto a proper course of action .

Spoke to a UK friend in finance recently.  They said the belief there is that the Euro zone will split with northern Europe and Estonia retaining the Euro and the rest let go. Was told it isn't a matter of 'if' but 'when'.

Thoughts anyone?

Well certainly something has got to happen with the Euro. At present it is just a form of confidence trick, where the strugglers are allowed to run deficits for decades, yet somehow can continue to have a 'strong' currency. This would only be possible with massive internal migation of workers away from the strugglers, but it is probably too late for that, as the populations have aged so much.

There are a range of options, but the strong nations will be keen to maintain their exports if possible, and to avoid rampant nationalism at home.

Happy New Year!

Nine 2011 Predictions
 
1. The U.S. will implement QE3/4 when the $600 billion of QE2 is not enough (already it is not enough as admitted by the Fed's chairman Benjamin Shalom Bernanke recently on CBS' 60 Minutes).  Except it won't be called as such in the lamestream media.  QE3/4 will be in the trillions of U.S. dollars (USD) of quantitative easing, i.e., fake digital money printing from the Fed to sop up unwanted U.S. Treasuries.  The unstated and ONLY purpose of QE2 and QE3/4 is to buy up all of the U.S. Treasury debts that the foreign nations are beginning to refuse to buy while they are quietly dumping what they possess on the U.S. and world markets in exchange for real and tangible assets and resources.
 
2. The major export nations like China, Russia, Brazil, India, Argentina, and others will engage in and increase their non USD-denominated trading among themselves, as exemplified by the recent China-Russia trade agreements whereby they would start trading in Rubles and Yuans, and not use USD as is typically transacted in international trades for commodities and oil.  This will put increasing devaluation pressures on the USD.  So, look forward to the US Dollar Index to drop further from the low 80s now to the low 70s or even lower in 2011.
 
3. Retail food prices in the U.S. will increase in the low to medium DOUBLE digit ranges (10% to 40%) for everything from the junk/GMO "foods" served by corporations like McDonald's to healthy/organic foods supplied by companies like Whole Foods Market.  This will take place noticeably in the first half of 2011.
 
4. The real estate market in Canada will finally begin its collapse suddenly after the new year celebrations are over, mimicking the real estate crash of the U.S. that began in late 2008.  Over heated markets like Vancouver will suffer the most as the average house price there is around $1 million Canadian (the Canadian dollar is almost on par with the USD).  The average homeowner in Vancouver is spending about 70% of its BEFORE-tax income on paying mortgages.  This financial situation is totally unsustainable.  To illustrate a parallel, past example why it is going to be the case:  In 2005, the "median" California family spent almost 73% of their AFTER-tax income on their "median" California house ($477,700), and look what happened to the real estate market in California.  A 50+% devaluation of the Vancouver real estate market is very likely over the next 1-3 years.  But the crash will begin in early half of 2011.
 
5. The Chinese real estate market, the last investment vehicle in China for those Chinese with money, will also begin its collapse suddenly, hitting hard cities like Shanghai, Beijing, Fuzhou, etc.  According to a very recent article by UK's Daily Mail Online, there are as many as 64 MILLION empty homes in China with no one occupying these brand new homes!  This China real estate crash will have serious implications for the real estate market in Vancouver.  There won't be m/any Chinese millionaires plunking down $1+ million CASH for buying real estate in Vancouver, as has been the case over the recent years.
 
6. Inflation will run rampant in China as it is already doing so with retail food prices.  Unless China allows its Yuan to appreciate (increase in value) against the ever falling USD, rampant inflation in China will continue its course unabated.  If China allows its Yuan to appreciate by any significant amount (7% or more), such an action will DECIMATE its export industries and manufacturers, because of the extremely thin profit margins that their exporters have to work with.  China will raise its interest rates to try to stop inflation but that will not do the job.  In fact, raising interest rates will only cause more foreign currencies to go into China in search of higher yields, unless China imposes strict restrictions on the importation of foreign currencies and investments.
 
7. The EU will continue its financial collapse, as nations like Spain, Portugal, and Italy will join Greece and Ireland in facing the stark choice between (Option 1) bailing out THEIR banksters or (Option 2) having THEIR nation go bankrupt.  The IMF/World Bank model of "rescuing" these EU nations were perfected on the so-called Third World nations such as Argentina (viz., John Perkins' book, "Confessions of an Economic Hitman").  In 2001, Argentina defaulted on its IMF loans, i.e., it was forced to take Option 2, and its people suffered tremendously as the majority of its middle class was literally wiped out overnight.  The Banksters in Argentina (with such strange and exotic names like JPMorgan Chase, Citibank, etc.) were able to fly out their billions of USD on private jets before the forced conversion and devaluation of the Argentina pesos/savings were implemented on the masses.  Millions of Argentineans keep their savings as USD in their banks before the collapse.  When the forced conversion and devaluation of those USD savings were imposed on its citizens, the banks were closed and ATMs withdrawals were limited to a few hundred pesos (less than $50 USD) per person per day.  Overnight, Argentineans saw their savings lose over 75% in value (the peso went from 1:1 to 4:1, requiring 4 pesos to buy 1 USD overnight).  And then the multi-national corporations came in like financial vultures and bought up the natural resources and public utilities for pennies on the USD.  THAT is IMF's Option 2 for Spain, Portugal, and Italy.  Option 1 is long term financial servitude and slavery for the citizens of the bankrupt country as is happening to Ireland.
 
8. Silver and gold will continue to climb in 2011.  Silver will increase much more than gold in 2011, as the "Crash JP Morgan, Buy Silver" viral campaign started by Max Kaiser in early November will take off exponentially in 2011.  Silver will breach $50 per ounce in 2011.
 
9. A major war will break out somewhere in the world in 2011 (if not in 2011 then definitely in 2012) involving the U.S. and/or one of its proxy allies, i.e., Israel, South Korea, etc.  The very recent massive war exercises conducted by South Korea and the U.S. were meant to provoke a military response from North Korea.  Fortunately, the North Koreans didn't take the bait.  This will be the final American Bubble to inflate as the U.S. will try to use "shock and awe" on either North Korea or Iran or even maybe a country in Africa in a futile attempt to bypass and cover up the greatest economic and financial collapse in world's history.    

 

 

The US economy is rapidly approaching the point where the only thing that can save it is a fullscale conflict akin to WWII, and not just another oil robbery such as Iraq.

China and North Korea make very convenient "bad guys" as far as the Yanks are concerned, because they know that many in the west believe Asian people to be "evil", and not actually human.

Without a near-miraculous economic recovery, the USA needs a total wartime mobilisation to salvage anything from the recent trainwreck.

 

If you seriously believe that, then, dude, you don't know America at all.

Hello

Going out an doing a bit of carpet bombing on a Sunday after noon.All the news channels would say Iran deserves a few fly overs. There is an expiry date on these bunker busters so they have to get rid off them fast.

Another war might not go down to well as fuel is tad pricey.

The Big boys are hell bent on selling this climate change.

Trouble is they need you to pay for it.

Nick said we should go first as we borrowed it any way.

We can't borrow an spend more than you earn.

Thats is NZ's main concern

 

 

 

All the news channels would say Iran deserves a few fly overs.

Yet another reason why rational people have little interest in news channels.

Another war might not go down to well as fuel is tad pricey.

The people most interested in going to war are also the people who set fuel prices. They don't pay retail. They don't pay at all. 

We can't borrow an spend more than you earn.

We seem to have had no problems doing that up to now.

Thats is NZ's main concern.

Nah, that'll be the Rugby World Cup.

 

Where did anyone here "wish" for that to happen?

Oh, you're one of those people who believes we should worship the U.S.A. and "forever be in their debt for saving us back in WWII."

Wait, you never said that.

This place is full of people who assign motives based upon zero facts.

A month ago steven said that the US is " dead and finished " ........... I came out with some arguments to counter his point ( WW II wasn't mentioned ) ............ and all hell broke loose upon the Gummy nut ! ............... Some here just love to knock .......... But the fact remains   that the GDP of the USA  is 25 % , a full quarter of global GDP .

It still matters , what happens in America . She is one of the 4 cylinders pumping the global financial engine .

Another way you could look at it is that the US GDP is bigger than the next three combined.

It also has 11 of the worlds 21 aircraft carriers, with a further 6 in reserve.

Dad was just over there and saw all the warships mothballed(San Diego I think), with apparently very little work required to bring them into active service. 

Bottom line is they have the ability to take what they want should the need arise.

The bottom line is they don't need to " take " anything .

The global reach of major US firms earns them plenty . And they're still the world leader of technological innovation .............. Why would any of this change so suddenly , as some here think .............. Because of a pissant housing bubble that collapsed ? Get real !

I agree.

What most also don't see is a huge cultural difference between the east and west. It is called the self-conscious or unselfconscious culture.

The west innovates while the east copies and refines. The west will always be one step ahead.

So why hasn’t New Zealand gotten richer?

I don’t have an obvious answer.

I welcome your thoughts.

Maybe, Bernard, it’s because there are lies, damn lies, and then there’s statistics.

Per capita income doesn't of course measure the distribution of income within a society. Obvious examples of that are countries like Thailand and Indonesia which are very very rich, much richer than New Zealand, but their per capita income is very poor, much worse than ours.  New Zealand may well be richer now than it was in 2000; it’s just not as equally distributed as it was back then. Moreover, New Zealand corporations which export their profits overseas are not going to do much for our per capita income either.

Hardly rocket science, despite higher commodity prices earnings have been flat as volumes for eg meat , static. Dairy production is now hugely dependent on imported stock food palm kernel

We have exported our earnings to the banks, only have to look at record profits despite recession

And everyone loves those flat screen tvs

Higher export earnings have probably been used to pay down debt or repatriated overseas as profits. 

These high commodity prices won't last forever, then things could get interesting. China is the main driver of world-wide demand these days and one day it's boom time will end. Predicting how and when is the tricky bit. Hopefully the US and Europe will have recovered when it does.