NZ: Terms of trade bounced strongly in Q4 to its highest level since Q2 2014 - ANZ

Philip Borkin, Senior Economist at ANZ, explains that largely on the back of stronger dairy prices, New Zealand’s terms of trade bounced strongly in Q4 and is back at its highest level since Q2 2014.

Key Quotes

“It is therefore at historically strong levels and is clearly a key factor underpinning NZD valuations. While the outlook from here is probably more one of stability than further strong gains, the historically high level is providing a clear boost to national purchasing power. That said, associated volume data suggest net exports will again drag on GDP growth in Q4 (to a larger degree than we expected), providing a clear offset to higher prices for the likes of the current account balance and farm incomes.

• The OTI goods terms of trade surged 5.7% q/q in Q4, beating consensus expectations (4.0% q/q). It is the first lift in two quarters and takes the index back to its highest level since Q2 2014, which was a multi-decade high. In fact, it is now only 3.7% below those levels. 
• NZD export prices rose 4.8% q/q. And with the NZD TWI lifting around 1% over the quarter, this actually implies an even bigger lift in “world price” terms. While most major export categories recorded stronger NZD export prices in the quarter (with the exception of wool), the largest gain by far was in dairy prices, which rose 14% q/q. 
• NZD import prices fell 0.8% q/q, implying relatively flat “world” prices. After some large increases, NZD prices for petroleum and petroleum product imports lifted a more modest 0.6% q/q in Q4. Quarterly movements in other components were also reasonably modest. 
• Associated volume data suggest net exports will again drag on GDP growth in Q4. Seasonally adjusted export volumes fell 5.8% q/q, led by an 8.1% q/q drop in dairy export volumes. In fact, weak dairy export volumes are no doubt a key factor supporting higher prices. Import volumes rose 1.2% q/q, with mixed movements at the components level. While we had not envisaged the extent of net export drag suggested by these figures, at this stage we are maintaining our Q4 GDP growth estimate at 0.7% q/q.”