NZ: Fall in Q3 terms of trade to mark cyclical low - ANZ

Philip Borkin, Senior Economist at ANZ, suggests that while the NZ’s terms of trade fell in Q3, he believes this will mark the cyclical low now that export commodity prices have lifted.

Key Quotes

“The terms of trade are still at a historically strong level (just 10% off its highs), which is a remarkable outcome considering the earlier weakness in dairy prices. It is a key factor supporting fundamental NZD valuations. Associated volume data suggest net exports will drag on Q3 GDP growth, in line with our expectations.”

“KEY POINTS

• The OTI goods terms of trade fell 1.8% in Q3, which was modestly weaker than consensus expectations (0.0% q/q). This is the second consecutive fall and the fourth fall over the past five quarters. However, the index is only 10% below its mid-2014 highs, which we believe is a decent outcome considering the earlier weakness in global dairy prices. Additionally, we believe Q3 will make the low point. 
• NZD export prices fell 2.8% q/q. However, given the NZD rose 4.5% over the quarter, this implies modestly stronger prices were seen in “world” terms. Every major export category recorded weaker NZD export prices in the quarter (emphasising the influence of the stronger NZD), but the largest falls were seen in forestry and non-fuel crude materials. Dairy and meat prices fell 3.7% and 3.1% respectively. 
• NZD import prices fell 1.0% q/q, which again implies stronger “world” prices. Unsurprisingly, this was led by prices for petroleum and petroleum products, which rose 12% q/q (in NZD terms), following on from a 20% q/q gain in Q2. 
• Associated volume data suggest net exports will drag on Q3 GDP growth. Statistics NZ has not released seasonally adjusted figures, but our own estimates suggest that export volumes fell 1.4% q/q, while import volumes rose 3.1% q/q. A drag from net trade is in line with our expectations, and reverses the positive contribution made in Q2. At this stage we estimate Q3 GDP growth of 0.6% q/q.”