Overseas Trade Indexes - Q1 2002

Data Flash (New Zealand)

Result: The terms of trade rose 1.5% qoq, driven by a 3.8% qoq decline in import prices. Export volumes rose 1.1% qoq while import volumes rose 3.7% qoq, the latter driven by strong growth in consumption imports.

Implication for markets: None. The result is consistent with our estimate of 1.2% qoq GDP growth in Q1.

Comment

The sharp improvement in the terms of trade played a key role in buffering the economy against the impact of global weakness, boosting national income at a greater rate than implied by growth in GDP (see chart above). Despite rising in Q1, we think that the trend in the terms of trade will be downwards over the coming year, largely reflecting a decrease in world prices for New Zealand's commodity exports, and dairy prices in particular. Together with the impact of monetary tightening (through higher interest rates and an appreciating exchange rate), the decline in the terms of terms of trade will help to depress domestic demand going forward, helping to offset the impact of very strong migration flows and a strengthening global economy.

Prior to today's data, our estimate of Q1 GDP growth derived using expenditure-based indicators was running well ahead of the 1.2% qoq estimate derived from production indicators. The weaker-than-expected outcome for growth in export volumes has acted to completely close the gap between our two estimates. Therefore, in advance of Friday's all-important manufacturing survey, we remain comfortable with our pick of 1.2% qoq GDP growth in Q1 (GDP data is due for on 28 June).

Key points

Export prices fell by 2.3% qoq - less than expected by the market - to be 3.7% lower than a year earlier. Given a 4.1% appreciation in the average TWI over the period, this implies a rise in the world price of New Zealand's exports, in sharp contrast to the substantial decline suggested by the ANZ commodity price index. We think this discrepancy is purely a matter of timing (due to the impact of forward pricing agreements), and expect very sharp declines to be recorded over coming quarters, with declining world prices compounded by the recent rise in the NZD.

Import prices fell by 3.8% qoq - more than expected by the market - to be 1.0% weaker than a year earlier. Lower oil prices were a key factor underpinning this fall - excluding mineral fuels, import prices would have declined by 2% qoq. Given a 4.1% rise in the average TWI (even when calculated using the different method used by Statistics NZ to convert foreign currency denominated import prices), this implies around 2% qoq growth in world price terms.

Given the estimated movements in export and import prices, the merchandise terms of trade rose 1.5% qoq in Q1, compared with market expectations of a 1.1% qoq decline. However, the terms of trade were 0.6% weaker than a year earlier. Our forecasts for export and import prices imply that the terms of trade will weaken very substantially over coming quarters, with a decline in excess of 4% qoq possible in Q2.

Export volumes increased by 1.1% qoq in Q1 - weaker than we had expected (this represents the flip side export prices being stronger than expected). A 6.6% qoq rebound in exports of dairy products and a 2.8% qoq rebound in exports of non-food manufactures, together with continued growth in seafood products, was partially offset by a 18.7% qoq decline in exports of forest products.

Import volumes increased by 3.7% qoq in Q1. A strong rise in imports of consumption goods (5.6% qoq) and intermediate goods (2.5% qoq) was partially offset by a 24.9% decline in imports of capital goods (this followed an 18.3% rise in Q4). Very strong growth in consumer durables was the key driver of the increase in imports of consumption goods, while the volatile transport group made the strongest contribution to the decline in imports of capital goods, with imports of capital plant falling by a more modest 4.8% qoq in Q1 following growth of 8.5% qoq in Q4.

The terms of trade for services rose by 1.0% qoq, reflecting a 0.3% rise in export prices and a 0.6% decline in import prices.

Darren Gibbs, Senior Economist, New Zealand

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