KEY POINTS:
The relative purchasing power of New Zealand's exports is the highest it has been since 1974.
The terms of trade - the ratio of export to import prices - improved 0.6 per cent in the the June quarter, Statistics New Zealand said yesterday, to be 2.4 per cent higher than a year ago and 12.4 per cent higher than five years ago.
And economists expect further gains in coming quarters as higher world prices for dairy products flow through to the data.
"We are still in the midst of a structural shift to higher terms of trade, courtesy of higher soft commodity prices," said ANZ National Bank chief economist Cameron Bagrie.
"This is a positive development for New Zealand's longer-term economic development and living standards."
The exchange rate climbed 4.7 per cent during the quarter, so both export and import prices fell in New Zealand dollar terms.
But import prices fell 1.7 per cent ( despite a 3.1 per cent rise in oil prices), outstripping a 1.2 per cent fall in export prices (despite a 3.4 per cent rise in dairy prices).
The terms of trade have yet to reflect much of the recent surge in world dairy prices. They show dairy prices 4 per cent lower than in the June quarter last year, whereas ANZ's commodity price index recorded a 48 per cent increase, in New Zealand dollar terms, over the same period.
ANZ's index reflects spot market-based prices compiled fortnightly by the US Department of Agriculture, while Statistics New Zealand's reflects the price Fonterra actually gets for its shipments during that quarter (ignoring any currency hedging). So there is a lag between the ANZ and Statistics NZ figures.
"As export prices play catch-up we expect a large terms of trade increase in the September quarter," Bagrie said.
Despite the most favourable terms of trade in 33 years New Zealand ran a trade deficit of $5.6 billion in the year ended June. Export volumes rose just 0.4 per cent, as pastoral products and fish all declined even in seasonally adjusted terms.
Import volumes by contrast rose 3.3 per cent, driven by increases in capital goods and motor vehicles.
"Firms have been taking advantage of cheaper capital goods to boost investment spending," ASB economist Daniel Wills said.
Bagrie said that if there was any comfort for the Reserve Bank it was in the 4.2 per cent fall in imports of consumer goods - an indication that domestic demand was waning. "In addition a strong 15.9 per cent increase in capital goods import volumes points to more investment by businesses, which will help alleviate some of the capacity constraints in the economy."
