NZ trade balance surging further into surplus

Australia Economic Research

New Zealand: trade balance surging further into surplus

New Zealand’s trade balance improved further in March, rising from an upwardly revised surplus of NZ$335 million to a surplus of NZ$567 million (J.P. Morgan: NZ$400 million; consensus: NZ$354 million). Both exports and imports surged over the month, by 21.9% and 16.6% respectively, and finished the first quarter significantly above 1Q09 levels.

The most notable element in today’s trade report was the strength in exports over the first quarter of 2010. Indeed, exports posted the first quarterly rise since 4Q08, jumping 10.4%oya, led by stronger sales of dairy products. Higher prices for exported milk powder, butter, and cheese were largely responsible for the result - Statistics New Zealand reported today that the dairy group recorded the largest quarterly increase in sales since 4Q07.

This result is all the more notable given the RBNZ’s subtle shift in rhetoric in the OCR announcement earlier this morning. In discussing the outlook for the economy, which Dr Bollard believes will recover “in line with or slightly faster than our March Statement projection”, greater emphasis was placed on the role of export earnings and booming trading partner growth to supplement sluggish domestic demand. The March trade report confirms this message, showing that the year to date trade balance continues to improve, after turning sharply upward in January 2009, and is now close to breaking into surplus at -NZ$196 million.
 

 
Given the booming growth conditions in Asia, in particular in China, now New Zealand’s second largest trading partner, we expect Kiwi exports to be well supported in 2010. Even aside from the cyclical lift in Asia, structural demand factors within the region are also moving in New Zealand’s favour. New Zealand’s dairy cooperative Fonterra has sold significantly more New Zealand milk powder for consumption in China since the melamine debacle in 2008. In fact, Fonterra recently said that it expects China to be the world’s largest dairy market in 25 years, which will bode favourably for New Zealand’s all important export sector.

Despite the sharp move up in sequential terms over the month, merchandise imports remain below March 2009 levels, down 4.9%oya. Mechanical machinery and equipment (-19%oya) and electrical machinery and equipment (-28.8%oya) have been very weak due to plummeting business investment. Similarly, in year-ended terms, weaker imports of petroleum and products, down 25.7%oya, are boosting the year-ended trade balance, but are indicative of the prolonged deterioration in domestic demand experienced in the last year. Today’s spike in monthly imports, though, is a pleasing development, hopefully indicating that further improvements in the trade balance will stem from greater external demand, rather than plummeting capital and consumer spending.
 

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