ASB shocked terms of trade holding up better than expected

ASB shocked terms of trade holding up better than expected
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ASB says it is surprised to see terms of trade holding up better than anticipated, although it warns it may not stay that way for long.  

The latest trade data review from the bank said New Zealand's terms of trade rose 0.4 percent in the June 2023 quarter, "substantially outperforming" ASB's estimate of a 3 percent fall.  

ASB explained the "surprise bounce" appeared to be driven by a surprising resilience in export prices, which fell only 0.6 percent over the quarter.  

Out of New Zealand's key exports, dairy prices fell only around 2.1 percent over the quarter, while meat prices managed a robust 7.4 percent lift. Forestry prices performed poorly, down 11 percent, which ASB said likely reflected the China demand during the quarter.  

"Both dairy and meat prices look to have held up more strongly over the quarter than we'd have anticipated based on more timely monthly data already released by Stats NZ," ASB said. "That data had pointed to a 7 percent fall in dairy prices and a more modest gain in meat prices of circa 4 percent."  

With export volumes managing a decent lift and import volumes declining, ASB said the upshot is a sizable lift in export revenue and a narrowing in the trade deficit this quarter. Export volumes lifted 6.8 percent over the quarter, as foreshadowed by lifting primary production over the quarter.  

Meanwhile, import prices fell 1 percent, led by a 6.6 percent fall in petroleum import prices. Import volumes also fell around 2.8 percent, though the headline figure is skewed by a substantial -24.1 percent fall in petroleum import volumes from their higher baseline last quarter.   

But the decelerating domestic economy may be weighing on import demand, with volumes flat or down for many key categories this quarter across both consumer and capital goods: food and beverages (-0.5 percent), plastics (-8.7 percent), iron and steel (-11.1 percent), electrical machinery (-3.3 percent), and transport equipment (-1.2 percent). The notable exception was for mechanical machinery, where volumes lifted 8.3 percent to reach a fresh record high.  

ASB is sceptical this resilience in export prices will be sustained though, given more recent shifts in commodity prices. The ASB Commodities Index, which is calculated based on more timely weekly data, showed that both global meat and dairy prices have continued to trend lower, with our meat price index down about 7 percent since March and our dairy price index down as much as 20 percent over that period.   

Meanwhile, on the imports side, oil prices have begun to regain ground over recent months. Over the last three months, key oil benchmarks have lifted as much as 15-20 percent. But ASB warned there is usually a lag before shifts in global commodity prices are reflected in the reported trade data.  

Looking ahead, ASB doesn't see much likelihood any substantial recovery in New Zealand's terms of trade for another 12 months.  

"With the market well-supplied in the near term and the Chinese economy continuing to falter, we don't anticipate dairy prices will move much higher for some time," ASB said.  

"More broadly, the deterioration in the Chinese economy and the relatively subdued outlook for global growth are likely to carry further downside risk for commodity prices in general and demand for NZ's exports in particular."