Terms of trade at 40-year high

Peter McIntyre
Peter McIntyre
New Zealand's terms of trade with the rest of the world improved 2.3% in the three months ending December to reach a level not seen since December 1973 - 40 years ago.

Instead of a surge in export (or dairy) prices, a 2.8% fall in import prices drove most of the improvement in the terms of trade.

Craigs Investment Partners broker Peter McIntyre said it was important to note that falling import prices - with export prices largely the same - increased New Zealand's international purchasing power.

Import prices fell across the board, reflecting a rise in the New Zealand dollar. Lower import prices kept inflation in check, something with which the Reserve Bank would be happy.

''If we hadn't had the geopolitical risks, such as we see in the Ukraine, the chances of our currency rebounding higher were very strong. Risky currencies, where the kiwi is included, have seen a loss of investor interest as bonds and safe-haven investments have proven attractive,'' he said.

Drama in Ukraine had potential to escalate and dent investor sentiment. Markets despised uncertainty, and political turmoil usually added a bit of nervousness.

''Markets will likely remain focused on developments in Ukraine over the coming days, as worries grow that Russia could become more forceful and that some Western countries could retaliate in some way.''

Equity markets pared some of their gains during the weekend as investors were spooked at the emergence of Russian troops in Crimea, and after the acting president of Ukraine, Oleksandr Turchynov, accused Russia of following a similar path to that which eventually led to a brief military conflict with Georgia in 2008.

There was an acknowledgement the ''good trade times'' could not last forever.

However, the demand for ''soft'' commodities of food was increasing as the global economy strengthened, Mr McIntyre said.

New Zealand found itself in the same place as Australia was in the days before the global financial crisis, with demand for hard commodities being replaced for demand for food.

The big question to be answered was how strong could New Zealand's currency still go as the terms of trade continued to improve.

''These latest figures will attract the attention of currency investors around the world,'' he said.

Westpac senior economist Anne Boniface said the sky-high terms of trade would provide a key pillar of support to stronger growth in the New Zealand economy this year.

''We suspect a good chunk of the recent strength in the terms of trade reflects structural changes in the drivers of New Zealand's key exports - particularly, increased demand for commodity goods from China and other emerging economies.

''While we expect New Zealand's terms of trade to ease in the course of 2014, as increased global supply weighs on key export commodity prices, over the medium term we are optimistic sustained strength in the terms of trade will remain a feature of the New Zealand economic landscape.''

Mr McIntyre said there had been much focus on Christchurch and Auckland in recent months as the drivers of New Zealand's economic growth. However, it was down to the regions when it came to providing good terms of trade growth.

A third of New Zealand's export income came from south of the Waitaki River.

''The Government's focus is on exports and this is where it is all happening.''

 

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