Overseas Trade Indexes - Q4 2001
Data Flash (New Zealand)
Result: The terms of trade fell 2.2% qoq, driven by a 1.8% qoq decline in export prices. Export volumes fell 1.8% qoq while import volumes rose 1.8% qoq, the latter driven by strong growth in capital imports.
Implication for markets: None. The result is broadly consistent with our estimate of 1.2% qoq GDP growth in Q4.
A sharp improvement in the terms of trade has played a key role in buffering the economy against the impact of global weakness, boosting national income at a greater rate than implied by growth in GDP (see chart above). However, as signaled by various indicators, the terms of trade have now begun to fall, largely reflecting the decrease in world prices for New Zealand's commodity exports, and dairy prices in particular.
All other things equal, a lower terms of trade will help to depress domestic demand going forward. However, as discussed in our latest Economic Forecasts, released today, the impact of a declining terms of trade is expected to be offset by the lagged impact of monetary easing, strong migration flows and, gradually, a strengthening global economy, propelling the economy to above-trend rates of economic growth by year-end.
The movements in export and import volumes during Q4 were broadly in line with our expectations. If anything, export volumes were not quite as weak as we expected, adding to the upside risk around our already above-market pick for Q4 GDP growth of 1.2% qoq. We will finalise our estimate following this Thursday's manufacturing survey.
Import prices were stronger than market expectations. However, as discussed below, this appears to be largely a function of the exchange rate assumption used to convert foreign currency prices. This is consistent with our sense that global inflation remains subdued given the weakness in growth over the past year.
Export prices fell by 1.8% qoq, broadly in line with our expectations but less than expected by the market. Weaker world prices for non-food manufactures and dairy products were the key factors driving export prices lower.
Import prices rose 0.4% qoq, compared to our expectations of a 0.8% qoq decline (the market was looking for a 1.5% qoq decline). The rise occurred despite an 11.5% qoq decline in crude oil prices (excluding mineral fuels, import prices rose 1.1% qoq).
In each case, a weaker NZD moderated an estimated fall in world prices. However, this effect seems to have been especially notable with respect to import prices. This reflects the method that is used for converting foreign currencies denominated import prices into NZ dollars (a method that differs from that used to convert foreign currency export prices). On a TWI basis, we estimate that the average exchange rate in Q4 was 0.9% weaker than in Q3. This compares with the circa 2.5% qoq used by Statistics NZ to convert foreign currency denominated import prices. This differential probably goes along way towards explaining the surprise rise in import prices in Q4. We expect import prices to fall by around 4% qoq in Q1 2002.
Given the estimated movements in export and import prices, the merchandise terms of trade fell 2.2% in Q4 - the largest quarterly decline since Q1 2000. However, the terms of trade remained 3.6% higher than a year earlier and 10.0% higher than in Q1 2000.
Export volumes decreased by 1.8% qoq in Q4. Lower exports of non-food manufactures and dairy products were partly offset by higher exports of fish. At least in part, we think that the weak result reflects dairy production that has gone into stock, to be exported over subsequent quarters.
Import volumes increased by 1.8% qoq. The volume of capital goods rose 18.3% qoq, boosted by a strong imports of small aircraft and helicopters. Excluding the volatile transport group, investment in capital plant rose a still robust 9.1% qoq. The volume of imported consumption goods was broadly flat and the volume of imported intermediate goods fell 2.7% qoq.
The terms of trade for services rose by 0.5% qoq, reflecting a 1.6% rise in export prices and a 1.1% rise in import prices. This result was largely the reverse of that which occurred in Q3, with recorded weakening in the exchange rate during Q4 having a significant impact on these indexes.
Darren Gibbs, Senior Economist, New Zealand