NZ terms of trade spiked in 4Q

NZ terms of trade spiked in 4Q, but export volumes tanked

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After declining for six straight quarters, New Zealand’s terms of trade jumped 5.7%q/q in 4Q (J.P. Morgan 0.6%), marking the largest rise since 1Q76. The terms of trade shot well beyond our forecast, owing to a sharper than expected drop in import prices. Import prices tumbled 58%q/q in 4Q, thanks largely to elevated NZD, whereas export prices fell a mere 0.3%, allowing for the significant spike in the terms of trade.

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Importantly for our GDP forecast, Statistics New Zealand also reported today that export volumes declined 1.2%q/q in 4Q, marking the first fall since 3Q08, and import volumes rose 1.6% Despite solid demand for exports from New Zealand’s major trading partners in Asia, and of course Australia, falls in petroleum products, dairy, and fruit and vegetables drove export volumes significantly lower. Net exports will, as a result, subtract significantly from fourth quarter GDP growth.

We have, therefore, trimmed our preliminary GDP growth forecast to 0.6%q/q, having also taken into account other data released this week on construction and manufacturing, which both look set to provide a positive contribution to economic growth in the fourth quarter. Manufacturing sales volumes rose 3.1%q/q in 4Q, and a rise in home construction led to a 0.7% increase in building work put in place.

That all said, with the signals on the economy inconsistent (the monthly indicators have painted a gloomier picture of the economy in early 2010), our forecast is for the RBNZ to delay the first OCR hike until July. The RBNZ said in December that “conditions may support beginning to remove monetary stimulus around the middle of 2010,” a statement we expect will be reiterated in tomorrow’s OCR announcement. Bollard has signaled his desire for hard evidence that the recovery is sustainable. The RBNZ, therefore, probably will defer the start of policy normalization until after the late-June release of the 1Q GDP print. We expect the first move will be a 50bp hike.

ENDS

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