Terms of trade numbers best in 37 years

Export prices grew faster than import prices in the first three months of the year, delivering the most favourable terms of trade for 37 years.

The terms of trade, calculated by Statistics New Zealand, measures the amount of imports that can be funded by a fixed quantity of exports.

It has improved 20 per cent over the past 18 months but nine-tenths of that was a swift recovery of the ground lost when commodity prices tumbled after the global financial crisis.

The gains in the past two quarters were more modest, 0.9 per cent in the March quarter, following 0.8 per cent in December.

The latest quarter's export price rises were widespread: dairy products were up 5.5 per cent, meat up 10 per cent, manufactured goods up 4.3 per cent, forest products up 4.2 per cent and oil up 18.6 per cent. New Zealand exports about one barrel of oil for every three it imports, providing a partial hedge against soaring crude prices.

Import prices rose 5.4 per cent in the quarter. Oil accounted for half the increase.

ASB economist Jane Turner said dairy and meat prices had been underpinned by higher grain prices because of large global crop losses.

"Meanwhile, oil prices increased as political turmoil in the Middle East and North Africa raised the perceived risks that oil supplies get disrupted," she said.

"Typically, when export commodity prices increase the New Zealand dollar also increases. However, over the March quarter the dollar was weighed down by the February earthquake and the 50 basis point cut in the official cash rate."

Turner said the lag, typically one quarter, between higher export prices on spot markets and higher export receipts suggested dairy prices could increase further in the current quarter, underpinning another lift in the terms of trade.

Beyond that, however, the rising dollar would limit further increases.

ANZ's commodity price index, also released yesterday, recorded a 0.3 per cent rise in world price terms, to a new high in the 25-year history of the index.

But the stronger kiwi dollar saw the index fall 0.8 per cent in local currency terms, though it remains high by historical standards and 12 per cent higher than it was a year ago.

If exports outperformed imports in terms of price, the opposite was true in volumes.

Export volumes fell 0.3 per cent while import volumes rose 5.1 per cent, the seventh quarterly rise in a row.

Dairy export volumes rose 7.6 per cent, seasonally adjusted, to a record high. Meat volumes were down 6.5 per cent, but that followed a 17 per cent rise in the preceding quarter.

Goldman Sachs economist Philip Borkin sees the medium-term outlook for the terms of trade as positive, underpinned by increased demand for protein in emerging economies.

"We do expect it to moderate slightly over the next two years, however, as export prices retreat from current high levels, with tight supply conditions abating, and oil prices rise."

Turner said the strong increase in the terms of trade over the past year represented an income gain for New Zealand. But in the first instance it is mainly an income gain for farmers and had been mostly used to pay down debt or saved. "This has muted the stimulatory impact on the domestic economy," she said.

"However, it has also allowed New Zealand to reduce one of its key economic vulnerabilities, placing it in a stronger position from a financial perspective."