Strong commodity prices push up NZ's trade terms

Strong dairy exports bode well for economic growth. photo by Craig Baxter.
Strong dairy exports bode well for economic growth. photo by Craig Baxter.

New Zealand's terms of trade surged 7.5% in September, much higher than market expectations.

The stronger than expected result largely reflected higher than expected export prices.

The terms of trade represent New Zealand's purchasing power with the rest of the world.

ASB economist Christina Leung said strong global commodity prices remained a key support for the third-quarter terms of trade.

''However, the export volumes story was not quite as positive, with a decline in dairy and meat exports driving a more modest fall in export volumes in the quarter.''

Statistics New Zealand figures showed export prices increased 8.9% in the quarter, stronger than the increase in global commodity prices in the quarter would suggest, she said.

Higher dairy prices, which surged 24% in the third quarter, remained a key driver.

During the first half of this year, supply concerns as the summer drought intensified drove a surge in global dairy prices.

''It is very encouraging to see global dairy prices continuing to increase, despite a recovery in dairy production volumes in recent months, reflecting continued strong global demand, despite the Fonterra whey contamination scare in August.''

Export prices were also boosted by a strong increase in forestry and meat prices in September, up 6.8% and 7.9% respectively, reflecting strong global demand for other key commodity exports, Ms Leung said.

The ASB commodity price index showed prices remaining high across those three commodity groups in recent months, indicating continued strength in export prices over the remainder of the year.

Import prices recovered 1.2% in the quarter, following four consecutive quarters of declines.

While higher petroleum prices were a major influence behind the recovery during the quarter, excluding petrol, import prices increased 0.8%, partly reflecting the easing in the New Zealand dollar's value over the quarter, she said.

''Today's stronger than expected result bodes well for national income growth. Over the past year, the terms of trade have increased 16%.''

The Fonterra whey contamination scare in August provided some challenges for the dairy sector, but the effects on New Zealand exports were shortlived. Global dairy prices remained at high levels, while milk production continued to recover in the wake of the summer drought earlier this year. Fonterra last week confirmed its record milk price payout of $8.30 kg ms for the 2013-14 year.

''These developments are very positive for our dairy sector. We expect a continued recovery in imports over the coming year on strengthening domestic demand, particularly in the household sector.''

Stronger retail spending was encouraging an increase in imports of consumption goods. Recent business surveys had pointed to an improvement in investment intentions and that was likely to support a continued increase in capital goods imports over the coming year, Ms Leung said.

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