NZ terms of trade: Prices down, volumes up - ANZ

Philip Borkin, Senior Economist at ANZ, notes that the NZ terms of trade fell over the June quarter, partially unwinding the surprising strength in Q1.

Key Quotes

“And while a further modest fall is possible in the September quarter, we do believe a trough is close at hand. The terms of trade therefore remain at a historically strong level, which is remarkable given the adjustment seen in global dairy prices, and is clearly an important factor justifying current NZD outperformance. Associated volume data suggest a strong contribution from net exports to Q2 GDP growth, although this is likely – at least partially – to be offset by a drag from inventories.

KEY POINTS

• The OTI goods terms of trade fell 2.1% in Q2, which was slightly weaker than consensus expectations (-1.5% q/q). This partially unwinds the (surprising) lift in Q1. But when all is said and done, the terms of trade are down just 8% from their highs, which is remarkable considering the earlier considerable weakness in global dairy prices.
• NZD export prices fell 1.9% in the quarter. With the NZD rising over the quarter, this implies broadly flat prices in “world” terms. Weaker dairy prices (-7.1% q/q) were partially offset by small gains across seafood, forestry and non-fuel crude material export prices.
• NZD import prices were effectively unchanged in the quarter (+0.2% q/q), which implies slightly higher “world” prices. Prices for petroleum and petroleum products rose 19% q/q, following two consecutive quarterly falls of around 25% q/q, with every other major import sub-sector recording lower NZD prices in the quarter.

• Associated volume data suggest net exports will make a strong positive contribution to Q2 GDP growth. Export volumes surged 10.2% q/q, while imports rose a far more modest 0.7% q/q. There were large increases across a number of export categories, but particularly dairy and meat. It is likely that a lot of this growth came out of inventories, dampening the impact on the GDP accounts. Nevertheless, we continue to see some upside risk to our current estimate for Q2 GDP growth of 0.8% q/q.”