KEY POINTS:
New Zealand is enjoying the most favourable terms of trade for 34 years after soaring dairy prices dwarfed an oil-fuelled rise in import prices.
The terms of trade, a measure of the volume of imports which can be funded by a standard basket of the nation's exports, jumped 4.1 per cent in the March quarter, Statistics NZ said.
The increased purchasing power of the export dollar makes New Zealand a richer country.
Over 2007, gross domestic product rose 3.1 per cent but national income rose 5.1 per cent, the difference largely due to the rising terms of trade.
The quarterly improvement was better than anyone had expected; the market's median forecast had been a 0.9 per cent rise.
For the year ended March the terms of trade rose 11.3 per cent.
But economists warned that it was likely to be at or near its peak, with oil prices still climbing while falling dairy prices on the spot market have yet to show up in the prices Fonterra receives for the product it ships.
The Reserve Bank said in last week's monetary policy statement that it expected the past year's boom in the terms of trade to be completely eroded over the coming year.
But even if the terms of trade are back at 2006 levels by the end of the year, they would still be better than for 30 years before that.
In the March quarter, export prices rose 4.5 per cent, propelled by a 19.7 per cent jump in dairy prices. In the past year dairy prices have risen 63 per cent, the largest increase since 1972.
The Reserve Bank expects some of the factors driving that increase, such as drought in Australia, to reverse.
But it still forecasts dairy prices to remain above their historic average because of increased demand in emerging markets, changes to subsidy arrangements in the European Union and the diversion of agricultural resources to biofuels production.
On ANZ's commodity price index, world dairy prices peaked last November and have fallen 11 per cent since then.
But with the normal lags and a falling exchange rate, there might be a further increase to come in the export prices in the overseas trade indices (which are measured in NZ dollars).
"But you have to remember the meteoric rise in the price of oil, which New Zealand is still a net importer of," ANZ economist Khoon Goh said.
Even though some other export prices, such as seafood and beef, had improved of late, that was likely to be far outweighed by the recent rise in oil prices and other hard commodities that New Zealand imports, he said.
Oil prices rose 8.3 per cent on the March quarter but that was offsetby lower prices for manufactured goods imports and overall import prices rose by only 0.3 per cent. "There is no doubt we are on a higher structural plane for soft commodity prices, but like all asset prices, they can overshoot and some correction after last year's steep rise in dairy prices is to be expected," Goh said.
"For the overall terms of trade, even though we think the peak is near, it will only drop back to historically high levels."
Meanwhile export volumes fell 3.5 per cent from the previous quarter's record level.
Dairy export volumes dropped 10.6 per cent, but dairy shipments tend to saw-tooth around and quarterly movements of more than 10 per cent have been the norm during the past two years. Meat exports were up 4.8 per cent on the December quarter, seasonally adjusted, and up 3.8 per cent on the March quarter last year.
On the imports side, flagging domestic demand was reflected in a 1.6 per cent fall in consumer goods imports and a 12.2 per cent fall in car imports.
In all, import volumes were down 0.9 per cent in the quarter.
"Overall," said Westpac chief economist Brendan O'Donovan, "net exports are set to make a negative contribution to what is shaping up to be pretty sad March quarter GDPfigure."
