Terms of trade dips on commodity price falls, strong dollar

A strong kiwi dollar and falling prices for primary exports caused the terms of trade index to fall 0.7pc in the three months to the end of September. Photo / Supplied.

New Zealand's terms of trade - the amount of imports that can be funded by a fixed quantity of exports - fell in the third quarter, driven by export prices for the nation's primary sector exports continuing to fall from recent record highs, and a strong local currency.

The terms of trade index fell 0.7 per cent to 1288 in the three months ended September 30 as falling export prices outpaced declines in import prices and ended two months of quarterly growth, according to Statistics New Zealand. The index rose 2.4 per cent to a 37-year high in the June quarter. The terms of traded were still 3.3 per cent higher than in September 2010.

New Zealand's export prices fell 4 per cent over the period, compared to a 3.4 per cent decline for import prices.

A 4.8 per cent fall in export prices for dairy products led the decline, followed by a 9.1 per cent drop in forestry exports and a 4.8 per cent decline in meat products.

A strong New Zealand dollar eroded exporter profits during the period, with the currency climbing 4.2 per cent on a trade-weighted basis over the quarter and touching a post-float high against the greenback just below 90 US cents in July. The flipside of that equation is that it makes it cheaper for New Zealand firms to import goods. The kiwi has since declined as global fears over the state of world economy dim the appeal of riskier, higher-yielding assets.

The release comes a week after government data showed the merchandise trade deficit was smaller than expected in October as demand for New Zealand's core commodity exports underpinned international sales. Still, the current fragility in global markets leaves local exports vulnerable to a downturn, and the New Zealand Institute of Economic Research today warned the fallout from Europe's "debt mess" will probably drag on demand from the nation's trading partners.

Export volumes fell 0.7 per cent in the quarter to 1169, with a decline in non-food manufacturers including pleasure boat makers, while merchandise values dropped 3.4 per cent to $11.17 billion. Import volumes gained 2.7 per cent to 1696, while the value of inbound goods was flat at $10.97 billion.

The gain in imported products was led by an 18 per cent lift in the volume of capital machinery and plant, including pneumatic elevators and conveyors, and a 16 per cent increase in the volume of transport equipment, including railway wagons.

The terms of trade for services rose 3.1 per cent to 1162, the highest level since December 2007, as the price for imported services fell faster than exported services.