Former Economics Editor of the NZ Herald

Big dry widens trade gap

Deficit edges up to $2.2 billion in June quarter, but tally for year down from March.

This year's drought took a toll on the current account deficit in the June quarter as exports of primary products fell. Photo / Brett Phibbs
This year's drought took a toll on the current account deficit in the June quarter as exports of primary products fell. Photo / Brett Phibbs

The current account deficit widened slightly in the June quarter as drought took a toll on exports of primary products.

The current account reflects the difference between what the country earns from the rest of the world through trade and investment and what the rest of the world earns from New Zealand.

It was $2.2 billion in deficit in the June quarter, seasonally adjusted - $150 million more than in the March quarter.

For the year ended June the deficit was $9.1 billion, equivalent to 4.3 per cent of gross domestic product, down from a revised $9.5 billion or 4.5 per cent of GDP in March. That compares favourably with the internationally conspicuous peak of 8.8 per cent of GDP in December 2008.

In the June quarter seasonally adjusted exports fell $500 million to $11.3 billion, largely reflecting lower volumes of dairy and meat exports after the drought, Statistics New Zealand said.

This was partially offset by a $120 million decline in imports to $11.1 billion.

ANZ economist Mark Smith said improving terms of trade and a recovery in dairy production in the second half of the year looked set to deliver goods surpluses over the remainder of the year.

Offsetting the June quarter's slide in the goods balance was a $270 million reduction in the investment income deficit, driven by smaller profits among foreign-owned companies in New Zealand.

For the year the investment income deficit was $8.8 billion. It has been smaller than that only once in the past eight years.

The statisticians have revised both sides of the investment income balance, with the net effect of narrowing it by about $130 million a quarter, which should reduce the annual current account deficit by about $500 million.

Smith expects forthcoming statistical revisions to boost exports of services such as tourism and lower the annual deficit by about a further 0.5 per cent of GDP, providing more breathing space.

"Despite the high New Zealand dollar adversely impacting the tradeable sector, we expect current account deficits to approach, and possibly fall below, 4 per cent of GDP by the end of the year," Smith said. "While all of this is encouraging, high indebtedness remains a structural weakness of the New Zealand economy."

As at June 2013 NZ's net foreign liabilities were $151 billion, equivalent to 71 per cent of GDP. And that is flattered by $8 billion of quake-related reinsurance which has yet to be paid out - $10.5 billion already has - and which in the meantime is treated as foreign assets.

Excluding reinsurance the net liability position would be 75 per cent of GDP.

Banks account for the lion's share - $108 billion - of the net foreign liabilities.

Westpac chief economist Dominick Stephens said that from next year on the current account deficit was universally expected to widen for a couple of years as the Canterbury rebuild generated demand for imports and the profits of foreign-owned NZ firms improved in line with stronger economic growth.

Deutsche Bank chief economist Darren Gibbs said a rising global interest rate environment would increases the cost of funding New Zealand's considerable net external liabilities.

- NZ Herald

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