Unexpected advance in trade terms

By BRIAN FALLOW

The terms of trade, a measure of the quantity of imports which could be funded by a fixed quantity of exports, unexpectedly improved in the March quarter.

Export prices fell 2.3 per cent in the quarter, but import prices fell even more, 3.8 per cent, resulting in a 1.5 per cent improvement in the terms of trade. The markets had expected a 1.1 per cent decline.

Deutsche Bank economist Darren Gibbs said given that the exchange rate had fallen 4.1 per cent on a trade-weighted basis over the quarter, the 2.3 per cent drop in export prices implied world prices for New Zealand exports had risen, in contrast to the substantial decline recorded by ANZ's commodity price index.

"We think this discrepancy is purely a matter of timing, due to the impact of forward pricing agreements, and we expect very sharp declines over coming quarters, with declining world prices compounded by the recent rise in the New Zealand dollar."

Nearly half the fall in import prices is explained by the fall in oil prices.

Exports rose 1.1 per cent. Dairy exports increased 6.6 per cent and non-food manufactures rose 2.8 per cent, partially offset by an 18.7 per cent drop in forest product volumes.