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NZ terms of trade climbs to 37-year high, driven by dairy export prices

Thursday 1st September 2011

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New Zealand’s terms of trade – the amount of imports that can be funded by a fixed quantity of exports – rose to its highest level in 37 years in the second quarter, driven by gains in export prices of dairy products, petrol products, meat and wool.

The terms of trade climbed 2.3% to 1295 in the three months ended June 30, reflecting a 1.8% increase in export prices and a 0.5% decline in prices of imports, according to Statistics New Zealand. That marked the seventh consecutive quarterly rise to the highest level since the first quarter of 1974.

The quarterly data coincides with a season in which Fonterra Cooperative Group is paying farmers a record $8 to $8.10 before retentions for the milk and share of other earnings. Global commodity prices have been soaring on demand and reached a record high in May, based on the ANZ Commodity Price index, which has edged lower in the past two months.

“We have a positive medium-term outlook for the terms of trade and see it remaining high relative to history,” said Philip Borkin, economist at Goldman Sachs & Partners New Zealand. Still, “we do believe it is now close to a near-term peak and will moderate slightly over the next two years as export prices retreat from current high levels.”

Borkin said there are signs the rural sector is starting to spend and invest more rather than simply paying down debt, which should yield “positive growth multipliers” for the wider economy.

In the latest quarter, dairy prices rose 4.5%, petroleum products rose 12.8%, meat gained 2.9% and wool was up 12.2%

The decline in import prices was led by a 3.4% drop in prices for mechanical machinery, a 4% fall in electrical machinery, a 2.3% slide in transport equipment and a 2.4% decline in food and beverages, Statistics New Zealand said.

Export volumes rose 0.5% in the second quarter, as a 5.6% gain in meat and an 18% jump in fruit made up for a 3.6% decline in volumes of dairy products, a 4% drop in forestry volumes and a 6.4% decline in volumes of petroleum products.

Import volumes fell 2.4%, the first decline since the second quarter of 2009, with a drop in aircraft imports and fuel cited as the drivers.

The terms of trade for services fell 0.9%.


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