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Overseas Merchandise trade (Imports, Sept.)

Data Flash (New Zealand)

Key Points Statistics NZ reported a provisional trade deficit of $590m for the month of September compared with a revised deficit of $356m in August. Due to seasonal factors, large deficits are common at this time of the year - the average deficit for September over the past 10 years is $221m.

The provisional outcome represents a $38m deterioration compared with the deficit of $552m reported in September 1999. The importation of a large aircraft was a significant factor affecting the level of imports in September (and also last September). Excluding imports of capital transport equipment, the trade balance in September was little changed from the previous year.

The annual deficit rose slightly to $3,125m in September from $3,087m in August. The estimated level of exports in September was 22.1% higher than a year earlier, while exports for the three months to September were 20.8% higher than a year earlier. We estimate that around 17% of this movement reflects higher prices, with the remainder reflecting higher volumes.

The latest export outturn was weaker than we had expected, suggesting that net exports will make a less positive contribution to GDP in Q3 than factored into our recent Economic Forecasts. Detailed export data will be made available with the final trade release on 9 November. Over most of this year export values have tended to be revised up by around $30-50m with the release of the final figures, although a small downward revision was recorded in August.

Import values in September were 18.8% ahead of the same month last year, while imports for the three months to September were 16.9% higher. Given our estimate of a 20% increase in import prices over the same period, the implication is that import volumes are flat at best, in keeping with subdued consumer demand and a sharp decline in building activity. As the table below shows, imports of oil also continue to be a major factor underpinning high import levels. Excluding aircraft, the level of imports was in line with our expectations.

Market reaction: there was little reaction to the data which after, adjusting for different expectations regarding aircraft imports, was broadly in line with market expectations.

Commentary As discussed in our recent Economic Forecasts, we believe that the conditions are now in place for a significant improvement in the current account deficit, driven largely by an improving trade balance. The forecast improvement reflects our expectation of strong growth in export volumes (driven by robust world growth, a competitive exchange rate and continued growth in commodity exports); subdued growth in import volumes (due to weak domestic demand and import substitution); and our assumption of a recovery in the terms of trade (driven by our assumption of a significant fall in oil prices in the second half of 2001). Today's data does not change our view - most of our forecast improvement is expected to occur in 2001/02.

Although the trade deficit in September was higher than expected, this is largely due to the importation of a large aircraft. This import will have little impact on the current account balance if, as we suspect, the aircraft was brought into New Zealand on an operating lease rather than purchased outright. In the former case, only the leasing payments appear in the current account (as an import of services).

On this basis, we expect the current account deficit to fall to around 7.0% of GDP in Q3 2000. A more substantial fall to 6.1% of GDP is expected in Q4 2000, at which time the impact of on the trade balance of unusually strong imports in Q4 1999 (due to the importation of a frigate) will drop out of the annual calculation. Thereafter, we expect the current account deficit to decline to below 3% of GDP by Q1 2003.

As noted above, given our estimate of price movements, weaker than expected exports in September suggests that net export volumes may make a less positive contribution to Q3 GDP than factored into our latest Economic Forecasts. This suggests some downside risk to our preliminary estimate that GDP grew by 0.6% qoq in Q3 2000.

Darren Gibbs, Senior Economist, New Zealand (64) 9 351 1376

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