Fall in terms of trade not as bad as expected

Outsize falls in wool prices contributed to lower terms of trade in March. Photo by Sally Rae.
Outsize falls in wool prices contributed to lower terms of trade in March. Photo by Sally Rae.
Lower export prices led a fall in New Zealand's terms of trade in the three months ended March with the good news being the fall was slightly smaller than expected.

Terms of trade fell 2.3% in the quarter, with export prices falling 3.7%.

"We saw scope for a larger decline in export prices given the declines in commodity prices on spot markets.

"As a result, we expect further declines in export prices and the terms of trade over the June quarter, though from a higher first-quarter level than previously anticipated," ASB economist Jane Turner said.

The fall in export prices was fairly broad-based, reflecting the strength in the dollar. In the quarter, the New Zealand dollar-US dollar cross lifted 5.4%.

On spot markets, prices for dairy and and meat also fell in foreign currency terms. As a result, further falls in export prices were expected in the three months ended June, she said.

There were more "outsized" falls in wool and aluminium prices, reflecting weaker global prices.

Export prices for forestry, fish and non-food manufactured goods held up, suggesting global prices and demand for those goods remained firm, Ms Turner said.

Import prices fell by 1.5% in the quarter.

The smaller fall appeared to be due to the exchange rate used by the New Zealand Customs service to value imports.

If the "true" exchange rate had been applied, import prices would have fallen more and resulted in a smaller fall in the terms of trade, she said.

The terms of trade peaked in June 2011 at their highest level since 1974.

Falling export prices meant the export sector would be providing less support to the economic recovery this year compared with 2011, Ms Turner said.

"Import data suggest that underlying domestic demand is continuing to gradually recover, and low interest rates over the rest of 2012 should further support this recovery."

The latest New Zealand Manufacturers and Exporters' Association Survey of Business conditions completed last month showed total sales in April fell 1.51% with export sales increasing by 5.41% and domestic sales falling 6.09% on the previous corresponding period.

The survey sample covered $428 million in annualised sales with an export content of 43%.

Net confidence rose to 9%, up from the -20% reported in March.

Association chief executive John Walley said there was a continuation of the flat line seen in manufacturing for the past few years.

"Generally, the story is of sales just holding up but weak order books and a lack of confidence in future prospects remains prominent."

The big concern of the past six months or so had been staff numbers, he said.

Since September last year, there had been a contraction in staff numbers, suggesting manufacturers were reducing capacity and underscoring the soft expectations.

That was not a good long-term prospect.

Exchange rate difficulties again led the list of threats to manufacturers, Mr Walley said.

The Budget was largely a disappointment for manufacturers and exporters.

There were some helpful tweaks, such as the increased funding and development but, on the whole, it kept the status quo which had seen the traded sector stagnate since 2004, he said.

 

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