The external deficit has widened to $10.5 billion, equivalent to 5 per cent of the economy's output, and economists expect it to get worse from here.

The current account deficit, which 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, was $2.7 billion in the December quarter, seasonally adjusted.

It was $127 million wider than in the September quarter, driven by a $275 million increase in the investment income deficit.

The balance on goods improved, to a $341 million surplus as imports fell more than exports, but the balance on services, chiefly tourism and travel, was a deficit of $405 million as overseas visitors spent less while they were here.


ASB economist Jane Turner said the drought would have a mixed effect on the trade balance, with lower dairy volumes but higher dairy prices, and vice versa for meat.

"Beyond the near-term impacts of the drought we expect the trade surplus to remain supported by relatively elevated terms of trade," she said.

The latest quarter's deficit pushed the shortfall for the full year to $10.5 billion or 5 per cent of gross domestic product - a level often seen as a red flag because, as a rule of thumb, it indicates foreign claims on the economy will be growing faster than the economy itself, a trend which cannot be sustained indefinitely. In September it was 4.7 per cent and a year ago 4 per cent.

The current account is also a measure of how much national savings fall short of funding the investment going on in the economy.

Investment is set to surge as the rebuilding of Christchurch gathers momentum. While it will draw resources from the rest of the country, it will also pull them in from the rest of the world.

It comes on top of pent-up demand for residential construction in Auckland, the need for seismic strengthening in commercial buildings nationwide, and ongoing leaky building work. "National savings never looked like keeping pace, and still don't," Bank of New Zealand economist Doug Steel said.

"Not with rising house prices and very low interest rates encouraging consumption over saving," he said.

"We see the current account deficit nudging 6 per cent of GDP by the end of 2013 and 7 per cent by the end of 2014. That might, and should, garner a bit more attention from the market and rating agencies alike."

ANZ economists see the consumer as more debt-averse and believe that that, coupled with the Government reducing its deficit and a lift in export prices, will be enough to cap the increase in the deficit at around 6 per cent. The latest deficit pushed New Zealand's net foreign liabilities to $150 billion or 71.7 per cent of GDP, $2.2 billion higher than in September.

If $9.9 billion of earthquake-related reinsurance claims which have yet to be settled, and which in the meantime are counted as foreign assets, are backed out the ratio is 76.4 per cent of GDP, the highest since September 2010 and conspicuous by international standards.

Half of the external debt is owed to related parties, principally the foreign parents of banks and other corporates, which mitigates the risk such a high level of debt implies.

But Statistics New Zealand pointed to the fact that a growing share of the external debt was being owed by the government.