Terms Of Trade Underscore Nominal (GDP) Tailwind
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Terms of trade re-nearing record highs
Emboldening nominal GDP growth expectations
But dairy prices/payout likely peaking
And weak OTI exports imply caution on real Q4 GDP
News of Wheeler speech leaves us wondering
The December quarter Overseas Trade Indexes affirmed a
strong tailwind for GDP growth – at least in a nominal
sense. They were less positive about real growth in Q4,
but then less negative with respect to global inflation. So
in many ways the OTI data gelled with our view that real
GDP growth might struggle to push much higher from
here, but CPI inflation will likely rise regardless. Roll on
nominal GDP growth.
Starting with the merchandise terms of trade part of the
OTI report, they increased 5.7% in the quarter. This was a
bit higher than market (Bloomberg surveyed) expectations
of a 4.0% rise.
We anticipated a 4.6% increase, so weren’t materially
surprised by the actual result. Nor was the composition
too far from what we imagined, with merchandise export
prices up 4.8% and import prices down 0.8%. Dairy
export prices, in rebounding 13.7% in Q4 (in $NZ terms)
drove most of the change.
Given the inherent lags in the OTI recording methods, we
expect dairy prices will help drive a further increase in the
“official” terms of trade in Q1 2017. This would probably
push them just above the high point of Q2 2014 and so
within spitting distance of the record high of 1973. This
bears perspective, especially for those claiming the NZ
dollar is demonstrably overvalued.
Q/Q % change
Terms of trade
Actual
+5.7
- annual % change
Export prices
Import prices
Export volume - s.adj
Import volume - s.adj
* Bloomberg
Mkt Pick
+4.0*
Previous
-1.1R
+6.7
-1.1R
+4.8
-0.8
-5.8
+1.2
-2.7
-1.6R
-1.5
+3.4
Yet we wouldn’t want to push this terms of trade story too
far. This is because, as much as dairy prices have
importantly recovered, to a decent level – promising to
send billions more income through the economy – we also
believe they are close to peaking. The agriculture sector
might be of a similar mind given it was the main cause of
the slight cooling we saw in yesterday’s ANZ business
survey. Enthusiasm has been curbed.
We should also be careful about getting too carried away
with immediate real-GDP growth expectations, after the
export volume results we witnessed in today’s OTI
figures. They dropped a seasonally adjusted 5.8%. We
expected a clear fall, but not by that much. The dairy
export volume weakness in Q4 was no surprise. However,
the weakness in forestry and non-food manufacturing
was. The latter reminds us that the PMI has slowed a bit
of late, while manufacturers in yesterday’s ANZ business
survey were also lagging the national average.
The OTI export volume outturn surely plays into our
reservation around Q4 GDP growth. We estimate a 0.6%
increase in the latter, in production terms. And our
Peaking
Testing Highs
Index
Merch. Overseas Trade Indexes - Q4
Terms of Trade - OTI Goods
Dairy Export Prices
Index
Index
1600
2200
BNZ
Forecast
1500
1900
1400
1700
1300
1500
Global Dairy Trade
Price Index in NZD terms,
4 months earlier (RHS)
2000
1800
1600
1400
1200
1300
1200
1100
1100
1000
1000
OTI dairy export
price index (LHS)
900
800
900
600
700
800
700
57 59 61 63 65 67 69 71 73 75 77 79 81 83 85 87 89 91 93 95 97 99 01 03 05 07 09 11 13 15
Source: Statistics New Zealand, BNZ
Quarterly
500
2009
400
200
2010
Source: Statistics NZ, GDT, BNZ
2011
2012
2013
2014
Monthly/Quarterly
2015
2016
2017
Of course, the OTI data don’t have a direct tie in to the
CPI. However they do suggest that the deflationary pulse
from the higher exchange rate has been offset, to a large
extent, by strong export prices, overall, and the recent
firming up of global inflation, especially in commodities.
Therefore, one needs to be careful about translating the
recent robustness in the TWI into necessary weakness in
the tradables component of the NZ CPI.
Mixed
Annual %
change
OTI Merchandise Trade Volumes
25
20
Imports
15
10
5
0
-5
-10
Exports
-15
-20
Mar-96
Mar-98
Source: Statistics NZ, BNZ
Mar-00
Mar-02
Mar-04
Mar-06
Mar-08
Mar-10
Mar-12
Mar-14
Mar-16
Quarterly
expenditure-based GDP measure is now pitched lower, at
0.4%. Of course, New Zealand’s expenditure GDP
measure has been running substantially faster than the
production measure of late, so a wobbly result for Q4
2016 might represent some squaring up more than
anything else. Nonetheless, it’s something to note for the
Q4 GDP report, which, to note, is due 16 March.
But just as GDP might have slowed in Q4, annual CPI
inflation looks to be printing firmer in Q1, probably around
2.0%. This would be a return to the middle of the Reserve
Bank’s 1.0 to 3.0% target band miles earlier than the Bank
itself forecasts.
As for what the Reserve Bank thinks of the recent
economic news, presumably all will be revealed by
Governor Graeme Wheeler in his speech tomorrow
morning (9:00am NZT). While we welcome the address
we are less than impressed by way it has come to light. If
it is simply part of the Reserve Bank’s new scheduling of
speeches, around the new MPS loop, then why should it
have been kept under wraps until the eleventh hour?
It thus makes us wonder if Wheeler is leaning to a strong
(directional) message, which just can’t wait until the 23
March OCR review. If so, we think it more likely a dovish
one. Any hawkish tilt, however much justified (in our
opinion), would only encourage market pricing, which is
already stronger than the RBNZ on the OCR outlook, in
turn pushing the currency back up. Or Wheeler might
simply re-iterate the open-endedness that was stressed in
February’s MPS, that the Bank is in a holding pattern until
something strongly convinces it otherwise?
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