NZ: And yet more growth, without inflation – BNZ

Doug Steel, Senior Economist at BNZ, suggests that this morning’s NZ trade figures provide insight into the country’s growth and inflation dynamics by splitting the previously published trade values into price and volume components.

Key Quotes

“In doing so it is yet another set of information that points to strong economic growth with inflation absent.

Regarding growth signals, it doesn’t get much stronger than the exceptional lift in export volumes. The 10.2% increase in the quarter on a seasonally basis is the strongest increase since 2007. Consequently, export volumes were 9.6% higher than a year earlier. A big quarterly jump, in itself, wasn’t a surprise but the degree of strength was. It was more than double market expectations of a +4.5% gain and even surpassed our upbeat view of +7%.

Import volumes were close to our expectations, rising 0.7% in the quarter to be 1.8% higher than a year ago. In the detail, core capital goods imports bounced back strongly in Q2 following a peculiar dip in Q1. The increase fits better with a generally strong investment cycle which looks set to continue judging by business optimism, strong profitability and investment intentions seen in yesterday’s business survey.

So lots of growth positives here, but, again, inflation remains absent. Indeed, export prices fell 1.9% in the quarter to be 4.8% lower than a year ago. Dairy prices dropped 7% in the quarter, while non-food manufacturing prices fell 3.7%.

We anticipate the merchandise terms of trade to rise around 5% over the coming year or so. This is part of why we see the annual current account deficit narrowing towards 2% of GDP over this period from its most recent reading of 3%.

All else equal, stronger terms of trade should mean the RBNZ will be less aggravated by any given level of strength in the NZD. We’ll see. It hasn’t happened yet. Indeed, the terms of trade dipped today against a currency that is higher than the central bank anticipated. We can’t be sure where the balance lies because the Bank did not publish what it expected for the terms of trade on a quarterly basis. Meanwhile, trade prices remain weak.

It has also been a fundamental support to the NZ dollar. We expect further terms of trade driven income gains through 2017. This outlook is one reason why we do not see the NZD falling too far, even if the RBNZ cuts interest rates and the Federal Reserve hikes.”