ANZ Commodity Price Index - May 2002

Data Flash (New Zealand)
ANZ Commodity Price Index - May 2002

Comment

The ANZ index of world prices for New Zealand's commodity exports fell by a little more than we expected this month, with a decline in meat prices compounding a further fall in the dairy sector. Going forward, although we think that world prices for New Zealand's exports are close to bottoming, the sharp appreciation of the NZD, combined with our forecast of further appreciation over the year ahead, means that we look for a much deeper dip in NZD denominated export prices than forecast by the RBNZ in its May Monetary Policy Statement.

Strong growth in farm commodity prices has played a key role in underpinning growth in domestic demand despite a difficult global environment. Over the coming year, however, the farming sector will exert a negative impact on domestic demand. For example, if world dairy prices remain weak, and the NZD performs in line with our forecast, incomes in the dairy sector over the coming season could be around $1.7bn lower than last year (equivalent to 1.4% of GDP).

Fortunately, we expect the gap to be filled by strengthening demand elsewhere, especially in the construction sector, driven in part by strong migrant flows. For this reason, we still expect a further modest rise in interest rates. We continue to expect that the RBNZ will raise the OCR by 25bps to 5.75% at its next OCR review on 3 July. However, in our view, there is some risk that the RBNZ chooses to sit out the July interim review pending a fuller reassessment of the economic outlook at the 14 August MPS meeting (especially if the NZD makes further gains over coming weeks). We think the current probability distribution around no move/25bps/50bps is of the order of 20%/75%/5%.

Key Points

The average foreign currency price of New Zealand's commodity exports fell by 1.7% mom in May. The average price was 12.0% below last year's level.

In foreign currency terms, dairy product prices fell by a further 5.4% mom to be 33.6% lower than a year earlier. Lower prices were also recorded for beef and lamb. A 7.4% mom rise in the timber prices provided only a partial offset. Reflecting the appreciation of the NZD during May, the NZD price index fell 5.2% mom to be 19.3% weaker than a year earlier.

The NZD index was calculated using the average exchange rate over the month. Had the index been calculated using the exchange rates prevailing at the end of May, a fall of over 9% mom would have been recorded. The sharp appreciation of the NZD during the second half of May will be reflected in the June index.

Darren Gibbs, Senior Economist, New Zealand

***The attached research constitutes Deutsche Bank's proprietary information*** This, along with an extensive range of other publications, is available on our web site http://research.gm.db.com

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