Newsflash! New Zealand just printed a stronger than expected trade balance for August, as the deficit narrowed to 472 million NZD. Is its trade sector out of the rut?
A quick review of previous releases reveals that the gap between exports and imports has been falling since March this year when New Zealand had a trade surplus of 935 million NZD, before eventually turning into a deficit last July. Analysts had expected a wider deficit of 1.13 billion NZD for August, as dairy prices have steadily declined.
A closer look at the latest trade balance shows that exports picked up by a 15% from the previous month, led mostly by an increase in meat and live animal trade to China. Dairy shipments, which include milk powder, dairy, and cheese, recovered by 16% on a year-over-year basis. Pine logs exports, on the other hand, marked a 25% decline.
Before y’all conclude that all is well in New Zealand’s trade sector, note that the smaller trade deficit was also partly caused by a 12% annualized decline in imports, led by a drop in purchases of intermediate goods and crude oil. On a seasonally adjusted basis, imports chalked up a 0.4% monthly decline for August.
New Zealand’s exports to the U.S. picked up by an annualized 24% while shipments to the European Union saw a 12% gain. Meanwhile, its exports to China saw a 9.7% year-over-year increase to 596 million NZD, keeping the world’s second largest economy as New Zealand’s top trade partner.
With that, the country’s trade prospects could depend mostly on demand from China and the latest set of Chinese data doesn’t seem to be painting a rosy picture. Domestic spending seems to be in a rut, as Chinese import activity has slumped while falling price levels continue to weigh on demand.
Apart from that, plummeting dairy prices could continue to weigh on trade activity, as international buyers hold back their purchases in anticipation of even lower prices later on. And with the country’s top dairy producers such as Fonterra lowering milk payouts to farmers and suppliers, business investment might also take a hit and weigh further on equipment and energy imports.
If you’ve been paying attention to the School of Pipsology lesson on the major economies, you’d remember that New Zealand relies mostly on its trade sector for growth since it is an export-driven economy. Weak trade prospects could then drag its GDP down, which in turn could lead to more Kiwi weakness in the forex market.
Do you think this will be the case? Where do you see NZD/USD trading by the end of this year?