NZ: Overseas Trade Indexes - Q1 2001
Data Flash (New Zealand)
Export prices fell by 2.8% qoq in Q1 but were still 20.0% higher than a year earlier. The RBNZ had expected a 4% decline - the median market expectation was for a 2.1% fall. However, taking account of a downward revision to export prices in Q4, the annual movement was in line with the RBNZ's expectations (and our own forecast).
Around half of that decrease can be attributed to the stronger NZD - the trade-weighted index rose 5.7% qoq - offset to some extent by stronger world prices for New Zealand's export commodities (as suggested previously by the ANZ's commodity price index).
Import prices fell by 7.1% qoq in Q1 but were still 7.9% higher than a year earlier. The decline was only a little stronger than the 6% fall expected by the RBNZ but quite a bit weaker than the median market expectation of a 3.5% fall. We had expected a decline of 6.3% qoq.
The stronger exchange rate was again a significant factor underpinning the result. However, lower prices for oil also made a significant downward contribution. The petroleum and petroleum products index fell 19.6% qoq.
With export prices again outpacing import prices, the terms of trade increased by a further 4.7% qoq to be a huge 11.3% higher than a year earlier. The merchandise terms of trade is now at its highest level since 1990 and is acting as a very significant buffer to the economy (a point emphasised by the RBNZ as a reason why aggressive easing actions would be inappropriate at this stage, notwithstanding the deterioration in the global economy).
Exports volumes fell 1.7%qoq (seasonally adjusted) to be 1.5% higher than a year earlier. Dairy volumes grew strongly in the quarter - up 8.5% - but this was more than offset by significant declines elsewhere. Large falls were recorded in exports of meat, wool and forestry products. Non-food manufactures grew 1% but were just 0.2% stronger than a year earlier.
Import volumes rose 1.1% qoq (seasonally adjusted), largely reflecting the impact of greater imports of large aircraft and ships. Excluding those factors, Statistics New Zealand estimate that import volumes would have declined 0.9%. Lower levels of capital goods imports, in particular, was partially offset by increased imports of consumption goods, consistent with robust retail sales outcomes in recent months.
Allowing for differences between the OTI and National Accounts, we expect GDP exports to be broadly flat in Q1 while GDP imports will decline by 1%qoq. Thus, in our view, the OTI data imply a positive contribution from net export volumes to GDP growth during Q1. Pending Thursday's Manufacturing Survey (the final significant partial indicator to be released), the risks to our preliminary Q1 GDP pick of +0.8% qoq remain slightly skewed to the upside. We think the RBNZ's May Monetary Policy Statement assumed growth of around 0.5% qoq in Q1 (the exact estimate is no longer published by the Bank).
We think that the Q4 expenditure measure of GDP will be revised up slightly, reflecting the revisions to export prices and volumes contained in today's OTI release.
Today's price data, while weaker than the market expected (especially on the imports side), was not substantially different to the RBNZ's expectations and thus is likely to have had little impact on the RBNZ's thinking. We continue to view a 4 July rate cut as unlikely. The lack of export volume growth outside of the commodity sector, which the RBNZ had noted in its May Statement, remains disappointing. As discussed in our note, published yesterday, on merchandise export data for April, so far little improvement seems evident in Q2.
The narrowness of the export volume growth, and the dependence of export incomes on a continuation of robust prices, helps to explain why the RBNZ has placed great emphasis on the outlook for commodity prices in determining the future path of monetary policy. If drought conditions were to intensify or commodity prices ease substantially, aggregate export incomes could decline quite dramatically, thus undermining the recent expansion in domestic demand (although the agriculture sector will continue to benefit as hedging rolls off and the full benefit of the current weak NZD is passed through). For the moment, the above scenario remains a risk rather than a central scenario. We remain optimistic that the apparent lack of growth in non-commodity manufactures, even accepting the weakness in the global economy, reflects longer than anticipated lags from the weak NZD. It seems likely that most businesses will have been surprised at the lack of rebound in the exchange rate from its current level. We expect to see firms pursue more aggressive market expansion over the coming year, especially if the global economic climate begins to improve in Q4 2001 as we expect. A pick-up in the Australian economy in general (as suggested by recent indicators), and the imminent recovery in the Australian housing market in particular, should provide some encouragement to the export sector.
However, we think that the market has been overly aggressive in removing virtually all chance of a further RBNZ easing from the curve. Although not our central view, we believe that a 25bps rate cut on 15 August cannot be ruled out. This could be triggered by a continuation of disappointing global growth data, signs of substantial weakness in export prices or an extension of the recent decline in business and consumer confidence (which would threaten to derail the recovery in the retail and housing sectors).