Trade gets tougher but solid for exports

By BRIAN FALLOW

The going got heavier for New Zealand as a trading nation in the September quarter as export prices fell faster than import prices.

The terms of trade fell 1.8 per cent, meaning that 1.8 per cent less imported goods could be funded by the same quantity of exports, Statistics New Zealand reported.

The terms of trade have fallen in three of the past four quarters and are 7 per cent worse than a year ago, a steep decline by historical standards.

Export prices fell 2.8 per cent in the September quarter, following a 6 per cent fall in June. They are 12 per cent lower than a year ago.

The steepest falls have been in dairy products, down 12 per cent in the latest quarter and 36.6 per cent over the year.

Meat prices were down 1.2 per cent for the quarter (beef more than lamb) and 5 per cent for the year.

However, export commodity prices as tracked by ANZ have rebounded in October and November in world price terms and stabilised in New Zealand dollar terms, raising hopes that the worst of the terms of trade deterioration might be over.

The wild card there is the possibility of war in Iraq and the oil price.

In the September quarter import prices fell 1 per cent overall as a 2.1 per cent decline in consumer goods and car prices was offset by rises in oil and capital goods.

ANZ chief economist David Drage said that export prices, whether measured by the Statistics New Zealand overseas trade indices or ANZ's commodity price index, still remain at levels exceeding anything in the 1990s or second half of the 1980s.

The prospects in many of our export markets remain very solid, Drage said.

"We have seen some recovery in dairy prices over the past four months from their lows in July. Meat, particularly lamb, and wool prices remain near their highs in world markets helped most recently by fears of lower production from Australia because of their drought," he said.

"Sawn timber prices are solid, thanks to strong US and Australian housing markets and a lift in demand from Asia.

"And many of the horticultural prices, particularly kiwifruit, are as strong as they have been in a very long time."

Westpac economist Nick Tuffley said the fall in the terms of trade over the past year had offset those from the previous two years, which had reflected exceptionally high export commodity prices.

At current levels the terms of trade were back around average levels, he said.

"The falls in export and import prices will help in the near term to offset the continued inflation pressure being generated by strong domestic demand."