Tag Archives: New Zealand

Record Terms of Trade for New Zealand – Q2 2020

New Zealand’s terms of trade rose by 2.5 percent in the June quarter, reaching a new record high.

Terms of Trade – Q2 2020

  • Export prices rose by 2.4 percent – forestry product prices rising by 11.1%, and dairy product prices by 4.1%.
  • Import prices fell by 0.1 percent in the quarter, driven by lower petroleum and petroleum product prices. This is despite higher prices for cellphones, televisions and laptops.

NZ’s high Terms of Trade highlights how NZ’s role as a food exporter will likely provide the NZ economy with some buffer as the global economy is rocked by the COVID-19 pandemic.

What is the Terms of Trade.
The terms of trade index measures the value of a unit of exports in terms of the number of imports it can buy, or the purchasing power of our exports. This is similar to comparing the number of sheep exports that will buy a typical imported family car, from one time to another.

Formula: Terms of Trade (TOT) =

Export Price Index (Px)           x   1000 (base year)
Import Price Index (Pm)

  • An increase in the TOT (e.g. from 1050 to 1200) is called “favourable”
  • A decrease in the TOT (e.g. from 1050 to 970) is called “unfavourable”

A “favourable” (increase) in the TOT may come about because the average:

– export price rose and import price stayed the same
– export prices rose faster than import prices
– export prices stayed the same and import prices fell
– export prices fell but import prices fell faster

The index number that results tells us whether merchandise export price movements have been favourable relative to import price movements. An increase in the terms of trade from 1000 to 1100 represents an increase in the purchasing power of our exports of 10% which means, other things being equal, we would be able to buy 10% more from overseas. As a country we would be wealthier. A decline in the terms of trade would result in the opposite situation.

Limitations of the Terms of Trade

Terms of trade calculations do not tell us about the volume of the countries’ exports, only relative changes between countries. To understand how a country’s social utility changes, it is necessary to consider changes in the volume of trade, changes in productivity and resource allocation, and changes in capital flows.

The price of exports from a country can be heavily influenced by the value of its currency, which can in turn be heavily influenced by the interest rate in that country. If the value of currency of a particular country is increased due to an increase in interest rate one can expect the terms of trade to improve. However this may not necessarily mean an improved standard of living for the country since an increase in the price of exports perceived by other nations will result in a lower volume of exports. As a result, exporters in the country may actually be struggling to sell their goods in the international market even though they are enjoying a (supposedly) high price. An example of this is the high export price suffered by New Zealand exporters since mid-2000 as a result of the historical mandate given to the Reserve Bank of New Zealand to control inflation.

In the real world of over 200 nations trading hundreds of thousands of products, terms of trade calculations can get very complex. Thus, the possibility of errors is significant.

Evaluation

  • A decline in the terms of trade is not necessarily a bad thing. For example, a decline in the terms of trade may occur due to a devaluation in the exchange rate. This devaluation may enable a country to regain competitiveness and increase the quantity of exports.
  • The impact of a decline in the terms of trade will depend on the elasticity of demand. If demand is elastic, the lower price of exports will cause a bigger % increase in demand.
  • Some Less Developed Countries (LDCs) have seen an improvement in terms of trade because of rising price of commodities and food post 2008. It is not always LDCs who see a decline in the terms of trade.
  • It is important to distinguish between a short term decline in terms of trade and a long term decline. A long term decline is more serious for reflecting a fall in living standards.



Carbon Footprint – NZ v UK primary industry

Useful video on Food’s true carbon cost from the FT – mentions New Zealand apples being sold in the UK not necessarily having a greater global footprint. Apples kept in cold storage would cause a greater carbon footprint than apples being shipped from New Zealand.

Previously food miles (the total distance traveled as food is transported from its place of origin to the consumer’s plate) was one measure of the global footprint and New Zealand is particularly vulnerable due its large quantities of agricultural exports and its geographical isolation. However, transport had been taken out as it was difficult to single out one part of the food system and conclude that because it has come from thousands of miles away it is automatically less sustainable. Therefore, the food miles argument for favouring domestic produce was only valid if food is produced using identical processes around the globe.

In order to reduce CO2 emissions, merely taxing imported food can’t be seen as the answer. As CO2 is emitted at roughly all stages of the process of transporting food to the dining room table, an appraisal of the environmental cost of devouring food from different countries should assess CO2 emissions throughout the product’s complete lifecycle. Stages in a food’s lifecycle include sowing, growing, harvesting, packaging, storage, transportation and consumption. Every phase uses energy and consequently create CO2. These include; Direct Inputs, Indirect Inputs, and Capital Inputs. A simplified flow chart representation of these inputs and the farm outputs, including environmental impacts, but excluding the transport occurring outside the farm gate is shown in Figure 1. Although it was done in 2006 a study by Saunders et al assessed the total CO2 emissions released in the supply of four New Zealand and UK food products to British markets. The report showed (see Table 1 for report data) that in the case of dairy and sheepmeat production NZ is by far more energy efficient even including the transport cost than the UK, twice as efficient in the case of dairy, and four times as efficient in case of sheepmeat.

In the case of apples NZ is more energy efficient even though the energy embodied in capital items and other inputs data was not available for the UK. Onions – where transport emissions account for around two-thirds of all CO2 resulting form the supply of New Zealand crops – are the only product for which UK consumers can reduce CO2 emissions by favouring domestic produce.

A major contributor to New Zealand’s relative CO2 efficiency in dairy production is that New Zealand agriculture tends to apply less fertilisers (which require large amounts of energy to produce and cause significant CO2 emissions) and animals are able to graze year round outside eating grass instead large quantities of brought-in feed such as concentrates. European dairy farms involve housing animals for extended periods of time. The fact that New Zealand farmers do not require subsidies to be internationally competitive, unlike their British counterparts, indicates these efficiencies of production.

Reduced inflation in New Zealand with Covid-19

The inflation rate in New Zealand, as in many countries, is on a downward trajectory – it will take a lot of stimulus form the Reserve Bank to meet its policy target agreement of maintaining the CPI between 1-3%. Westpac have forecast a drop to 0.2% in 2021 and to remain below 1% until the middle of 2022. There have been some obvious reasons for less pressure on inflation:

  • Demand for goods and services both in NZ and overseas has dropped significantly and tamed any inflation. Most notably there has been a major drop in oil prices.
  • The use of ecommerce and, without the overheads of rents / staff, prices are often much lower than the high street.
  • With zero net migration and as excess capacity in long term rental market prices haven’t moved. Add to this the Government’s rent freeze.
  • A lack of tourist dollars has meant a shift inwards of the aggregate demand curve as exports of services fall – AD = C+I+G+(X-M).
  • With people having the growing uncertainty of job security there has been little additional spending or borrowing with the threat of redundancy hanging over them.
  • The wage subsidy has kept some companies afloat but there has been no room for wages increases/negotiations for such uncertain times. Therefore consumer spending has been limited compared to previous years.

Important to note that inflation figures that are quoted are usually on a yearly basis so it is the change in prices from today to this time last year. It will be interesting to see what state the economy will be in this time next year.

Unemployment drops in New Zealand

I was surprised to see the official unemployment figures issued today – down from 4.2% to 4.0%. However this reflects those workers that were laid off but unable to seek further employment due to the Level 4 lockdown but still included in the labour force. Remember the unemployment calculation is those people who are unemployed and actively seeking employment.

According to the ASB a better measure in the current environment would be underutilisation – It is defined such that jobseekers outside the labour force are captured (unlike the unemployment rate) and includes people working part-time who would like to work more hours. Utilisation rose from 10.4% to 12%. The unadjusted LCI, more of a ‘raw’ measure of wage costs, rose just 0.4% qoq, with annual growth slowing from 3.8% to 3.1%. Average hourly earnings from the QES slowed to 2.5% yoy for private sector workers, a multi-year low.

End of wage subsidy

Although these were positive signs for unemployment figures later in the year it is inevitable that these figures will deteriorate when the wage subsidy ends and we return to an economy which isn’t propped up by government spending. Unemployment is forecast to peak at 9.8% in September.

Source: ASB Bank – Economic Note – 5-8-20

Domestic tourists needed to bolster GDP in NZ

Although in New Zealand the containment of the Covid-19 has so far been successful, with no international visitors the tourism sector has seen a sharp downturn. Those that have suffered most are the smaller operators and bars, restaurants, accommodation providers. Even with the wage subsidy a lot of these firms have been forced out of business. Domestic tourism will be essentially for the survival of a lot of the tourist spots around the country. The return of overseas visitors is some way off and even when restrictions are lifted visitor numbers are likely to be limited.

Visitor arrivals in New Zealand

Source: Westpac Economic Overview – May 2020

Before Covid-19, Tourism was New Zealand’s largest export industry in terms of foreign exchange earnings. It directly employed 8.4 per cent of the New Zealand workforce. For the year ended March 2019:

  • the indirect value added of industries supporting tourism generated an additional $11.2 billion, or 4.0 percent of GDP.
  • tourism as whole generated a direct contribution to gross domestic product (GDP) of $16.2 billion, or 5.8 percent of GDP.
  • international tourism expenditure increased 5.2 percent ($843 million) to $17.2 billion, and contributed 20.4 percent to New Zealand’s total exports of goods and services.

As the economy struggles along people will be concerned about job security and look to be a lot more cautious with spending. However having been restricted during the lockdown there is the hope that New Zealanders will want to travel domestically.

Source: Tourism New Zealand

NZ Farmers seek anti-dumping tariff on potatoes

This is a very good example of barriers to trade – CIE AS Level Unit 4 and NCEA Level 2. There has been a lot of publicity about potatoes being imported from Holland and Belgium at a price below that of New Zealand farmers. Pw represents the price which dumped items are imported into a domestic economy which is below the domestic market price.

Source: Tutor2u

European farmers have traditionally been receiving subsidies from their governments which means they can drive down export prices. Dumping margins are currently between 95 to 151%.

(Domestic value − Export Price) ÷ Export Price x 100 = % Margin of Dumping

Domestic value: The normal value is generally the selling price of the good in the country where it was produced.

Export price: The export price is generally the exporter’s selling price reduced by any export charges that are included in the price, such as freight and insurance.

These margins are expected to increase with price undercutting for the NZ industry of between 18% and 38%.

The absence of a tariff will see NZ potato processors being forced to cut production and demand for potatoes from NZ growers would drop leading to higher unemployment in the industry. The imposition of an anti-dumping duty on dumped imports of frozen potato products, would help to maintain demand for New Zealand grown potatoes, and ensure the continuity of employment and business in the growing sector.  A duty would mean that the potato growers would experience the same market conditions, including competition between themselves and fluctuations in market prices, as they did before the dumping occurred. 

The value of exports of potatoes and potato products from New Zealand grew from $93 million in the year to March 2010 to $128 million in 2020; an increase of 38 percent. During the same period, the value of imports of these products increased from $47 million to $60 million; an increase of 28 percent.

Effects on consumers
It should be noted that there is no guarantee that the benefit of lower prices will be passed on to consumers.  It is probable that any advantage of low prices to consumers will not endure.  Dumping occurs because overseas producers have a glut of produce or a collapse in demand in their own markets, and both these conditions are unlikely to be sustained.  Accordingly, a longer term consequence for consumers is that they could face higher prices if New Zealand based processors and growers are forced out of business by the dumping.

Effects on employment
At the national level, potato growing and processing is a relatively small industry, but it still directly and indirectly provides employment for almost 5,000 people.  Potatoes are one of the few crops grown outside, produced in most regions of New Zealand and harvested all year round.  The industry is therefore an important provider of widely distributed and stable employment.

New Zealand Tourism will take a hit.

Tourism accounts for approximately 10% of GDP but the forecast doesn’t look good even with the success of eliminating Covid-19. NZ growth totalled $40.9bn last year of which $16.2bn – 5.8% GDP – came from tourism – see graph below. Tourism also helped the retail and hospitality sectors to the tune of $11.2bn – 4% GDP. But there are a number industries which have been hit hard by the lack of tourism due to Covid-19. The food and beverage industry relies on tourism and it accounts for 24% of the total food and beverage serving services.

Of visitors to New Zealand the three main ones are:

  • Australia – 23%
  • China -13%
  • Rest of Asia – 13%

New Zealand is more exposed to tourism than a lot of other countries; we rely more heavily on this sector for employment, income and GDP. In 2019, 229,566 people were directly employed in tourism (8.4% of the labour force). This is a significant portion of the labour market and is considerably higher than many other countries. It has estimated that 100,000 jobs could be lost in the tourism sector as a result COVID-19 – that is 40% of those employed in the sector. On 22nd April 2020 visitor numbers fell to zero – see graph below – as a result of the border closures. However the lockdown has given the tourism sector the chance to restructure the sector into a more sustainable model and be less reliant on overseas visitors. But the future is very fragile.

Arrivals to New Zealand

Source: ANZ Research – New Zealand Weekly Focus – 25th May 2020

Post Covid-19 scenarios – New Zealand & Global economies

ASB bank published some of its forecasting for the Global and New Zealand economies and number of potential routes – read the full article here. They have come up with a central scenario which focuses on what is actually happening at the moment although we know how things can change. They then do an upside and a downside around this central forecast. They also published some graphs that relate to their scenarios – see below.

The ASB also noted that compared to other countries New Zealand is currently in a good position:

  • The economy is going into a deep but short-lived contraction – the economy will recover.
  • NZ has more fiscal and monetary ammunition than other countries.

Where the economy actual ends up – how long is a piece of string? Stay safe.