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New Zealand Economic and Financial Overview 2015

External Sector

External Trade

External trade is of fundamental importance to New Zealand. Primary sector-based exports and commodities remain important sources of export receipts, while exports of services and manufactured products also provide a significant contribution. This, together with a reliance on imports of intermediate goods and capital equipment for industry, makes New Zealand strongly trade-oriented.

Merchandise Trade

The value of merchandise imports fell with the onset of the GFC, owing to weak domestic demand, uncertainty surrounding the global economic environment and a sharp depreciation in the New Zealand dollar. Domestic demand and import values picked up again in 2010 as the domestic economy recovered from recession. Import values contracted in 2012 and early 2013, owing to an elevated New Zealand dollar and weak import prices, but picked up in the remainder of 2013 and in 2014 on the back of strengthening domestic demand.

The level of nominal goods imports is expected to ease in the first half of 2015 owing to large falls in crude oil prices but to rebound strongly in 2016 as oil prices stabilise and low fuel prices lead to higher real incomes, boosting demand for other imported products. Growth in the volume of goods imports is expected to remain strong over the next couple of years, supported by the Canterbury rebuild and strong domestic demand.

Exports held up well through the GFC, mainly due to commodity demand from China and other emerging markets, which continued to grow strongly. Export values surged to new highs in 2011 on the back of a pick-up in dairy and meat prices early in the year, and the merchandise trade balance remained in surplus from April 2010 until March 2012. The trade balance deteriorated in 2012 as commodity prices fell and the exchange rate rose.

Commodity prices surged again in the first half of 2013 owing to robust demand from China, although the late-summer drought, through its impact on export volumes, led the trade balance to weaken. The trade surplus rebounded in late 2013 and early 2014 as agricultural production recovered and commodity prices rose to record highs. Dairy prices then began to decline as a result of rising global milk production and high inventories in China. As of January 2015, prices for New Zealand's dairy exports had fallen around 50% since February 2014, leading to declines in nominal exports and the annual trade surplus in the September 2014 quarter.

The level of nominal goods exports is expected to continue to decline in early 2015, but stabilise over the remainder of the year as dairy export prices recover, beef prices continue to rise on the back of stronger US demand, and demand for forestry products picks up owing to a gradual stabilisation in the Chinese housing market. Growth in goods export volumes is expected to slow in 2015, partly owing to earlier declines in dairy prices. However, export volumes are expected to pick up from 2016 onwards, as dairy production expands in response to a recovery in global demand.

The following table records the total value of exports and imports of goods since 2010.

Table 11 - Balance of External Merchandise Trade (1)
Year to November
(dollar amounts in millions)
Exports Imports Balance
of Trade
Exports as
% of Imports
2010 43,114 41,754 1,360 103.3
2011 47,247 46,960 288 100.6
2012 46,245 47,634 -1,389 97.1
2013 47,397 47,671 -274 99.4
2014 50,374 50,827 -453 99.1

(1) Includes re-exports

Source: Statistics New Zealand

Trade in Services

The largest component of services exports is tourism. The annual level of services export volumes has been broadly flat since 2003, with the high New Zealand dollar and the recession in many advanced economies during the GFC crisis having an adverse impact on visitor arrivals from traditional tourism sources, including the USA, Japan, the UK and Germany. Arrivals from Australia and China have increased, resulting in higher total visitor numbers. However, because Australian visitors stay in New Zealand for relatively short periods of time, this has resulted in lower average expenditure per visitor. On the other hand, the increasing number of visitors from China is expected to continue to underpin total tourist expenditure.

Other services exports include transport, telecommunications, education, and financial and business services.

Real services exports in the September quarter of 2014 grew by a solid rate of 2.5% from the September quarter 2013.

Growth in both the volume and value of services exports is expected to be relatively low in 2015, owing to the high New Zealand dollar and subdued growth in many tourism export markets. Growth in services exports is expected to recover in from 2016 onwards. Meanwhile, growth in the volume and value of services imports is expected to be robust over the next couple of years, with the imports of business services and expenditure overseas by New Zealanders boosted by a strong New Zealand dollar and solid performance in the domestic economy.

Terms of Trade

The terms of trade fell sharply during the GFC, as weakness in commodity prices and external demand led to a larger fall in export prices compared to import prices. As the global recovery commenced, the terms of trade recovered, hitting new highs in mid 2011. The terms of trade began to decline in the second half of 2011 and continued to fall over 2012, owing to renewed weakness in external demand facing New Zealand exporters, which again led to export prices falling faster than import prices.

The terms of trade rebounded strongly in 2013 to be up 20% in the year, as strong demand from China and subdued global dairy supply saw commodity export prices reaching all time highs. The terms of trade continued to rise in the first half of 2014, to a 40-year high in the June quarter, as large falls in import prices more than offset smaller declines in commodity export prices. However, the terms of trade eased slightly by 0.2% in the September quarter of 2014 compared to September 2013.

The terms of trade is expected to fall moderately into early 2015 from current high levels, as the decline in dairy export prices over the second half of 2014 more than offset the fall in crude oil import prices. The terms of trade are expected to pick up from mid 2015, as dairy prices recover and oil prices remain at a low level.

Figure 3 - Terms of Trade
Figure 3 - Terms of Trade.
Sources: Statistics New Zealand, the Treasury
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