NZ terms of trade surge upwards

Data points to an export-driven recovery rather than one driven by housing and consumption. Photo / Supplied

The international purchasing power of the export dollar jumped in the December quarter.

The terms of trade, which measure the international purchasing power of a standard basket of New Zealand's exports, rose 5.7 per cent, the largest quarterly increase since March 1976.

It reversed more than a third of the decline in the terms of trade which had occurred over the previous 18 months.

"It is a significant turnaround in one of the main negative influences of the global downturn," UBS economist Robin Clements said.

"And with world prices for New Zealand's main commodity exports reaching in February their second-highest level ever [as measured by the ANZ commodity price index], it is likely there will be further upside in the terms of trade this year."

The New Zealand dollar rose 4.6 per cent in the December quarter on a trade-weighted basis, pushing down prices for both exports and imports in local terms.

But despite the stronger currency, export prices overall fell only 0.3 per cent, while import prices fell 5.8 per cent.

The aggregate numbers hide wide variations, however. While dairy export prices rose 5 per cent, meat prices fell 8.3 per cent. Over the whole of 2009 the dairy products index was down 43 per cent and meat down 17.1 per cent.

Fruit prices were up - 16.3 per cent in the quarter but just 1.7 per cent over the whole year - while fish prices were down 8.2 per cent in the quarter and 19.8 for the year.

Overall, export prices fell 23.6 per cent over 2009 while import prices fell 16.7 per cent.

The steepest falls in import prices in the most recent quarter were electrical machinery, down 10 per cent, and mechanical machinery (a category in which the statisticians rather oddly include portable computers), which fell 8.6 per cent.

Meanwhile export volumes were down 1.2 per cent, mainly reflecting lower shipments of oil and dairy products, while import volumes were up 1.6 per cent.

The increase in imports includes an 8.2 per cent increase in plant and machinery, which is encouraging in the face of otherwise weak indicators of business investment.

But Statistics New Zealand took some of the gloss off that by noting that the increase in plant and machinery imports was led by mobile phones.

Car imports rose 32.2 per cent in the quarter to be more than double the inflow recorded at the low in March last year.

ASB economist Jane Turner said the improved terms of trade were a positive development "on the surface".

"But hidden by the improvement is weakness in some key export products. We expect some improvement in the export index in the short term, given the December quarter result did not capture the full lift observed in dairy prices late in 2009," she said.

"However, after that we expect the terms of trade to track sideways."

The improved terms of trade joins other indicators pointing to an export-led recovery and a reduced risk of a housing and consumption-led recovery the Reserve Bank was fretting about six months ago.

Goldman Sachs JBWere economist Philip Borkin said that while imports were expected to rise from their current depressed levels as inventories were rebuilt, a sluggish domestic recovery hardly portended a strong pick-up.