NZ: Terms of trade are a positive story - ANZ

Phil Borkin, Senior Economist at ANZ, explains that New Zealand’s terms of trade didn’t hit the record high they thought it would, largely because Q1’s large gain was revised lower.

Key Quotes

“However, it is clearly still a positive story overall. Not only is it a supportive force for national income growth, it underpins NZD valuations. Associated volume figures suggest net exports will make a positive contribution to Q2 GDP growth, as expected.” 

“Key Points

• The OTI goods terms of trade rose a smaller-than-expected 1.5% q/q in Q2. On top of a downward revision to Q1’s surge (now reported at 3.9% q/q, as opposed to 5.1% q/q), the index did not hit the all-time highs we thought it would. However, it was oh-so-close – we are talking about 0.1% here. Our forecasts assume that the terms of trade will more or less maintain these high levels for the foreseeable future.
• NZD export prices rose 2.4% q/q. After accounting for NZD moves, we estimate that “world” prices rose by around 0.5% q/q, which is the smallest gain in four quarters. Strong meat prices were a big contributor to the move in NZD prices (rising 9.2% q/q), although it is ultimately a case of broad-based gains. 
• NZD import prices rose 0.9% q/q, which implies lower prices in “world” terms of around 1% q/q. Petroleum and related product prices were lower (-4.2% q/q), but that was offset by gains in the NZD price for plastics and electrical machinery. Transport equipment prices also rose in NZD terms. 
• Associated volume data suggest net exports will contribute positively to Q2 GDP growth. Seasonally adjusted export volumes surged 6.8% q/q, which follows three consecutive quarterly falls. The quarter was dominated by a 19% q/q surge in dairy export volumes, although there were solid gains across a number of categories. Import volumes rose 2.3% q/q, which was led by a 19% q/q lift in petroleum imports. The rest of the picture was more mixed. Together with a likely strong lift in services exports (tourism related), it suggests net exports will make a decent contribution to Q2 GDP growth after dragging on growth to the tune of 1.0%pts on average over the past three quarters.”