Trade deficit narrowed in December

Trade deficit narrowed in December

        ·        Imports were relatively unchanged; exports were up

        ·        Net exports will remain a drag on GDP growth

New Zealand’s trade deficit narrowed to NZ$347 million in December (J.P.Morgan –NZ$600 million, consensus –NZ$100 million), from a revised deficit of NZ$588 million in November (previously -NZ$520 million). Imports were relatively unchanged as expected, but exports were surprisingly higher over the month. The annual trade gap was –NZ$5.62 billion, compared to–NZ$5.16 billion in November.

Exports rose 4.5% on both a year-ago and month-on–month basis. The unexpected rise in exports was owing to the sale of large aircraft (NZ$148 million). Meat and edible offal exports also recorded a solid 27.5%m/m rise. Exports of diary products and crude oil declined, with milk powder, butter and cheese falling 11.5% m/m and crude oil exports tumbling 48.5%.

On the other side of the trade ledger, imports were down just -1.8%m/m, but surged 15.2% from a year earlier. Mechanical machinery and equipment recorded the largest increase, up 16.4%, while the largest decrease was in imports of petroleum and products, which fell 16.4%.

Over the final quarter of 2008, the value of exports and imports both increased, rising 4.4%q/q and 1.5%, respectively. According to SNZ, dairy products contributed almost two-thirds to the increase, while the largest offsetting decrease came from crude oil – down more than 40%q/q. The rise in imports was mainly owing to higher imports of intermediate and consumption goods.

The dismal outlook for the global economy means there are tough times ahead for Kiwi exporters. A major concern will be the marked deterioration in conditions in the country’s dominant trading partners. In recent weeks, J.P.Morgan has downgraded growth forecast for Australia, the US, Japan, and China – New Zealand’s four largest export destinations. The threat of even weaker export demand, particularly from Australia, New Zealand’s largest export destination, means that net exports will remain a significant drag on growth in 2009. Even though the end of the drought should boost agricultural activity, export volumes probably will fall 3% this year.

Preventing an even sharper fall in exports this year will be any further NZD depreciation, which will boost exporters’ competitiveness. NZD fell 4.0% in trade-weighted terms in December, marking the tenth straight monthly decline.

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