In a world struck by inflation, New Zealand's trade deficit is widening in response to international price pressures.
The latest trade data released by Statistics New Zealand suggests that New Zealand may continue to experience a negative trade balance in the short-to-medium-term.
In the March 2022 quarter, the country's trade deficit increased to NZ$3.8 billion from NZ$1.4 billion the previous year.
Our main imports have increased faster than our main exports, as shown in the graph below.
Our main export category: milk powder, butter, and cheese has increased in value by 20 percent in comparison to the March 2021 quarter. At the same time, imports of petroleum and related products, and transportation have increased in value by 63 percent and 82 percent respectively, compared to the March 2021 quarter. Reflecting this, the first graph suggests that our exports, while overall growing in value, are lagging behind imports, widening the trade deficit.
Since the June 2021 quarter there has been a growing negative correlation between New Zealands merchandise export volumes and prices as shown in the second graph. Since the June 2021 quarter prices have increased sharply but, simultaneously, our export volumes have also been falling sharply, limiting any gains from higher prices.
Are overseas consumers buying less in the face of higher New Zealand export prices?
According to Statistics New Zealand, the export price of dairy products has risen by 34 percent compared to the March 2021 quarter, while export volumes have fallen by 11 percent over the same period. Moreover, the export price of meat has risen by 31 percent in comparison to the March 2021 quarter, while the export volume of meat has fallen by 12 percent over the same period.
The third graph depicts the import volumes and prices in New Zealand. Similar to exports, there has been a growing, but not as strong, negative correlation between import prices and volumes. Furthermore, New Zealand is a net importer of crude oil and non-fuel crude materials. These product categories are difficult to substitute when a price hike happens, leading to a smaller decrease in volume in proportion to the increase in price.
Due to the nature of New Zealands imports and exports, price changes have more of an effect on exports than on imports.
The price of petroleum imports increased by 77 percent in comparison with the March 2021 quarter, but their volume decreased by only seven percent in the same period. That is a considerable difference from the relative changes in price and volume that the countrys main export products had in the same period, as discussed above.
Finally, trade around the world is being shaken by the oil price hike that has worsened since the war in Ukraine started.
The current negative trade balance is closely related to the fact that we are a net crude oil importer.
According to Trading Economics, the majority of countries that currently have a positive trade balance are net crude oil exporters, while the majority of countries that currently have a negative trade balance are net crude oil importers. Since it is difficult to substitute away from crude oil imports, countries will have to bear the brunt of higher prices and widening trade deficits.