Terms of trade hit by price of petrol

New Zealand's international purchasing power weakened during the December quarter in an "unwelcome blip" that obscured a longer-term good news story, economists said yesterday.

The terms of trade - a measure of how many imports a fixed amount of exports will buy - decreased by 2.3 per cent over the three months to December.

The fall is the largest quarterly drop in 2 1/2 years and was worse than the 0.5 per cent decrease expected.

The change was due to a 0.6 per cent increase in import prices combined with a 1.8 per cent decrease in export prices.

The fall in export prices was led by a 9 per cent decrease in meat prices and lower prices for crude animal and vegetable materials, wool and hides.

The increase in import prices was largely driven by petroleum and petroleum products, up by 5.2 per cent.

ANZ economists said the fall in the terms of trade lowered New Zealand's purchasing power and living standards.

"It's an unwelcome blip," said ANZ head of market economics Cameron Bagrie.

He also said the terms of trade, although at a two-year low, remained at a reasonably elevated level, "so it is far from doom and gloom".

BNZ economist Craig Ebert agreed: "We wouldn't make too much of the downward surprise. It reflected a further increase in the price of imported petrol and petroleum products."

Westpac economist Brendan O'Donovan said lower export prices, thanks to softer commodity prices and a stronger dollar, had also weighed on the terms of trade over the quarter.

Although world commodity prices have fallen over the past nine months and are expected to ease further, Bagrie expected they would remain relatively high over the next 10 years, while the price of manufactured goods would continue to decline. The terms of trade would probably decline over the next six to 10 months.

"Five to 10 years down the track, I think there is a good-news story. Our terms of trade over the medium term are going to remain at reasonably elevated levels.

"There is solid demand for the goods we are producing and there is no excess capacity around the globe. Conversely, for the goods we import, there is an abundance of excess capacity.

"That's an unheralded potential factor why New Zealand could eventually get back up the OECD ladder."