Widening trade gap surprises experts

By Brian Fallow

Dominick Stephens is Westpac's chief economist.
Photo / Supplied
Dominick Stephens is Westpac's chief economist. Photo / Supplied

The country's external deficit widened markedly in the September quarter, as exporters earned less and foreign-owned banks earned more.

The current account measures the gap between what New Zealand earns from the rest of the world through trade and investment and what the rest of the world earns from us.

In the September quarter it was a deficit of $2.7 billion in seasonally adjusted terms, up from $2 billion in the June quarter.

It pushed the annual deficit to $8.7 billion, equivalent to 4.3 per cent of gross domestic product, up from 3.7 per cent three months earlier and the largest since June 2009.

The deterioration was despite terms of trade still close to a 37-year high and a boost to exports of services from the Rugby World Cup.

It was also significantly worse than market economists had expected; the median forecast was $8 billion or 3.9 per cent of GDP.

In the quarter the goods surplus more than halved, to $481 million from $994 million in June.

Exports fell $615 million, following three quarters of rises, led by lower prices for meat, dairy products and logs.

Imports fell $100 million, mainly reflecting lower volumes of oil imported.

Trade in services recorded a smaller deficit, $290 million compared with $402 million in the June quarter, boosted by spending by 80,000 visitors attracted by the World Cup.

The statisticians attribute their spending to the quarter in which they leave the country, so a further boost is expected in the December quarter accounts.

As usual the main driver of the current account deficit was the investment income balance.

It was $2.8 billion in the red in the September quarter, $380 million more than in June.

Foreign investors' earnings rose $441 million, mainly due to higher profits for overseas-owned banks, Statistics New Zealand said.

Insurance companies also saw their earnings recover after the hit in the Canterbury earthquakes.

The current account on an annual basis has been getting worse since the start of last year both in dollar terms and relative to the size of the economy.

The country's net external debt - the legacy of decades of deficits - is deteriorating too.

At the end of September it stood at $148 billion, equivalent to 72.9 per cent of GDP.

And that figure is flattered by some $12.7 billion of earthquake-related claims on overseas reinsurers which, until they are paid out, are counted as foreign assets.

Excluding them, the net liability position is $160 billion or 79.1 per cent of GDP. The peak was in March 2009 at 85 per cent of GDP.

At 4.3 per cent the latest deficit ranks New Zealand between Romania (4.1 per cent) and Spain (4.5 per cent).

Yet even with the deficit exceeding expectations, there was no market reaction, Westpac chief economist Dominick Stephens said.

"Markets are content letting current account data fly under the radar, even as deficits in general have come under increasing scrutiny by investors and rating agencies," he said.

"This is probably at least partly because at 4.3 per cent of GDP the current account deficit is well below recent peaks [8.9 per cent in December 2008] and safely within what is broadly regarded as sustainable territory."

But markets might become less tolerant of renewed imbalances in the New Zealand economy, he warned.

The current account deficit is forecast to widen next year on the back of falling exports, further import growth, improving returns to foreign-owned firms and rising interest rates.

Economists expect the current account deficit to continue to widen, to around 5.3 per cent of GDP by March 2013 and 6 per cent a year later.

"Absent a further shift higher in domestic saving, it remains to be seen whether the world will be willing to fund a material widening in New Zealand's current account deficit," said BNZ economist Doug Steel.

"If not, expect to see a lower NZ dollar and/or higher interest rates, via risk premiums, that will encourage a movement towards realigning domestic savings and investment."

- NZ Herald

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