Terms of trade rises more than expected on weak imports

New Zealand’s terms of trade had its biggest jump since 1976 in the fourth quarter, as a decline in import prices outpaced an unexpected drop in exports.

Terms of trade climbed 5.7% in the final three months of 2009, the first increase in seven quarters, according to Statistics New Zealand. That beat the 2.5% gain in a Reuters survey, though the composition was different, with import prices tumbling 5.8% against a forecast decline of 1.7% and exports falling 0.3% versus an estimated gain of 2%. The terms of trade fell 8.2% from a year earlier.

The terms of trade measures the amount of imports New Zealand can buy from a fixed quantity of exports. In the latest quarter, it was influenced by a 4.6% gain in the trade-weighted index of the New Zealand dollar, or TWI, which weakened export prices while driving down prices of imports.  

With rising prices for the nation’s commodity exports in world markets, there’s scope for terms of trade to improve further.The surge in the terms of trade “is a material medium-term positive for growth,” said Robin Clements, senior economist at UBS New Zealand.

Taken with indicators such as the recent surge in business confidence, it suggests “growth will gather momentum this year” and may help convince the central bank to start raising interest rates more aggressively than anticipated from mid-year, he said.

The TWI was recently at 64.98 from 64.96 immediately before the figures were released. The kiwi dollar traded at 70.33 US cents from 70.27 cents.

Prices of meat exports fell 8.3% in the fourth quarter, while fish declined 8.2%, offsetting the positive contribution from a 5% rise in dairy prices and 16.3% gain in prices of fruit, according to the government statistician. Imports of mechanical machinery fell 8.6% and electrical machinery prices declined 10%, leading the overall drop in import prices. Petroleum product prices declined 4.3% and food and beverages dropped 6.9%.

Petroleum products posted the biggest decline in export volumes, down 18.3%, while dairy product volumes slid 4%, while meat export volumes climbed 12.3%.

Capital goods and motor cars were the main contributors to the rise in import volumes.

Businesswire.co.nz

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