Falling import prices lift NZ's terms of trade

By BRIAN FALLOW economics editor

It got a little easier for New Zealand to pay its way as a trading nation in the March quarter.

The terms of trade, which measure the quantity of imports that can be funded by a fixed quantity of exports, improved by 1.7 per cent on the previous quarter. Export prices fell 2.7 per cent, but import prices fell 4.4 per cent.

The drop in export prices was modest, considering the exchange rate strengthened by 7.2 per cent in the quarter on a trade-weighted basis.

The fall would have been greater but for dairy prices, which were down only 0.9 per cent. Other commodities fared worse, with forest products down 6.6 per cent, meat 4 per cent and aluminium 5.1 per cent.

On the other hand import prices would have fallen 5.1 per cent had it not been for oil, which rose 0.3 per cent.

The 1.7 per cent overall improvement reversed the fall recorded in the December quarter. On an annual basis the terms of trade are 6.5 per cent down on a year ago.

But this is from the historically high levels of 2001 and the terms of trade index is still around the average levels of the past eight years.

The Reserve Bank expects the terms of trade to worsen over the next two years at a more moderate rate, but last month's Budget forecast a consolidation.

Deutsche Bank economist Darren Gibbs says the December quarter probably marked the bottom of the terms of trade cycle.

"Official export prices now broadly reflect the earlier declines in spot prices suggested by the ANZ commodity price index. The subsequent partial recovery in the ANZ index suggests an improvement in the terms of trade can be expected over the next 12 months."

Export volumes rose 1.9 per cent in the March quarter, seasonally adjusted, and import volumes fell 1 per cent.

The increase in real exports, following a 1.5 per cent rise in December, pushed the annual increase to 7.6 per cent, a strong result in an enfeebled world economy.