Terms of trade improve strongly in Q2 2011 to 37 year high

By David Chaston and Bernard Hickey

Dairy export prices helped lift the terms of trade to a 37-year high in the June 2011 quarter, Statistics New Zealand said today.

But economists said the best terms of trade since 1974 had yet to flow through to improved economic growth because farmers were deleveraging. Also, commodity prices had fallen since the end of the June quarter by around 12% in New Zealand dollar terms. See more here in ANZ Commodity Price index article.

The terms of trade rose 2.3%, meaning 2.3% more imported goods could be funded by a fixed quantity of exported goods than in the March 2011 quarter.

The latest rise was due to export prices rising and import prices falling.

In the June 2011 quarter, prices for exported goods rose 1.8%, reflecting price increases for:

- dairy (up 4.5%)
- petroleum and petroleum products (up 12.8%)
- meat (up 2.9%)
- wool (up 12.2%).

In the year to the June 2011 quarter, wool prices increased 58.3% to reach their highest level since the December 1989 quarter. The latest annual increase is the largest since the December 1976 quarter.

Prices for imported goods fell 0.5% in the June 2011 quarter. The most significant downward contributions came from mechanical machinery, electrical machinery, transport equipment, and food and beverages.

Excluding petroleum and petroleum products, import prices fell 1.4% in the June 2011 quarter.

Seasonally adjusted export volumes rose 0.5% in the June 2011 quarter, and are at their highest level since the series began in the June 1990 quarter. Total export volumes have remained at a high level over the last three quarters. Non-food manufactures were the major contributor to the overall rise in export volumes, while dairy had the largest offsetting contribution.

Seasonally adjusted import volumes fell 2.4% in the June 2011 quarter, the first fall since the June 2009 quarter. Capital goods and motor spirit were the main contributors to the decrease in total imports in the June 2011 quarter. A rise in intermediate goods partly offset these falls.

The price and volume indexes for exports and imports are compiled mainly from overseas merchandise trade data.

Deleveraging.

ASB Economist Jane Turner said the strength in export prices showed much of the export-led recovery over the past year had largely been in prices and incomes rather than increased production.

"However, ongoing caution in the rural sector has seen much of the increased revenue saved, rather spent, muting the stimulatory impact of higher export prices on the rest of New Zealand," Turner said.

Helen Kevans from JP Morgan said "We expect that the resulting boost to national income will give a further lift to growth throughout 2H11, but the multiplier effects from the income boost likely will still be limited to some extent."

"Some farmers continue to use the windfall from the higher terms of trade to reduce debt, which has so far delayed the full pass-through of higher farm incomes to broader economic activity."

"We believe, though, that the focus on balance sheet repair will soon abate, particularly given recent signs of stabilization in the rural property market. Indeed, the sheer size of the income boost, and its positive impact on farm revenues and cash flows, should mean that more of the income injection starts to filter through to the broader economy."