A rare climb into the black

New Zealand's trade balance at the end of July was in surplus for the first time in six years.

The surplus reflects strong export prices and the low dollar.

The Institute of Economic Research predicts economic activity will continue to grow at its present rate over the next six months, despite a slowing in foreign markets this year.

But it says the rapid improvement in the trade balance of the past year is unlikely to continue, as the improving economy is likely to attract more capital imports.

The revised trade figure, issued by Statistics NZ yesterday, lowers the surplus from $65 million, reported last month, to $45 million.

It is the first time the trade balance has been in the black since April 1995.

Dairy products accounted for 40 per cent of the increase in exports over the year.

A forestry exports recovery also helped.

Deutsche Bank senior economist Darren Gould said the latest result was consistent with recent improvement in the current account deficit, which the bank believed had "nudged just below 4 per cent of GDP" for the year to June. That figure is due to be reported on September 27.

But IER director Alex Sundakov attributed the trade figures mainly to a decline in imports of investment goods.

He expected investment to improve in the next six months, adding to capital imports and reducing the trade balance.

"The current account is on an improving trend, but we don't think the very rapid improvement of the past year is likely to continue," he said.

The economy overall grew by 2.5 per cent in the year to March and the institute predicts growth of 2.2 per cent to March next year. But it will be driven by different forces.

The volume growth in exports is likely to slow as a result of activity in our major markets falling from 4.6 per cent growth last year to an expected 1.9 per cent this year.

And the low dollar that boosted export earnings last year is expected to gradually rise in value, squeezing export returns.

But as the export outlook turns "fragile", the institute expects a lift in domestic consumption, caused by rising wages, moderate interest rates and migration gains.

This outlook, the institute warns, assumes that the world slowdown will not be prolonged.

Consumption growth would also suffer if migration did not increase as expected.

It predicts a gradual rise in residential investment as low interest rates and rising wages improve the housing market.

But businesses are likely to postpone investment until the international outlook improves.

Firms have been absorbing increased costs of oil, and are now facing higher electricity prices.