Deficit up to $8.6b and dairy slip yet to hit

Worsening terms of trade are tipped to push the current account deficit up towards 5 per cent of GDP by the end of this year. Photo / Richard Robinson

Current account gap isn’t big ‘by its own historical standards’ but trajectory more concerning, says economist.

New Zealand earned $8.6 billion less from the rest of the world through trade and investment in the year to March than the rest of the world earned from us.

The current account deficit was up from $7.8 billion in the year to December 2014 and the equivalent of 3.6 per cent of gross domestic product - the largest that ratio has been for a year and a half.

The deficit has ranged between 2 and 4 per cent of GDP over the past five years, well down on the 7 to 8 per cent range prevailing in the three years before that.

"[The] deficit is not large by its own historical standards, but the trajectory is more concerning," said ANZ economist Philip Borkin.

He expects worsening terms of trade - weaker export prices and a bounce in oil prices - to push the deficit out towards 5 per cent of GDP by the end of this year with the risk of further widening beyond that.

The Reserve Bank, in the forecasts it released last week, has the deficit widening to 6.8 per cent by March next year.

The latest result was better than the 3.8 per cent of GDP annual deficit the central bank had expected.

But Bank of New Zealand economist Doug Steel doubts that will calm the Reserve Bank's concern much "given its angst is more about the projected path of the external accounts rather than where they sit today".

Westpac economist Michael Gordon said that since the current account was typically reported as a four-quarter total, it tended to reflect developments in trade with a substantial lag.

"In this instance, the record-high dairy export earnings over the first half of 2014 are now giving way to the steep fall in world dairy prices over the past year. This lag means that today's low dairy prices won't be fully reflected in the current account balance for another year at least."

In the latest 12 months the goods balance flipped from a $1 billion surplus to a $500 million deficit.

"Exports of goods fell $1.3 billion over this time, mainly due to the fall in dairy prices, while imports of goods remained relatively stable," Statistics New Zealand said.

But the decline in the goods balance was partly offset by an improved services balance, as travel exports climbed to a record high, boosted by the Cricket World Cup.

Borkin said current account deficits were not usually a problem until markets began to worry about them.

"That doesn't appear on the horizon yet," he said. "However, a widening trajectory for the current account certainly highlights that the economy is still vulnerable to a turn in global investor sentiment and also suggests that the New Zealand dollar may have further to fall."

The Reserve Bank said last week that in light of the forecast deterioration in the current account, a further significant downward adjustment in the exchange rate was needed to put the country's net external position on a more sustainable path.

However, the net external debt at $139 billion is the equivalent of 58.1 per cent of GDP, the lowest that ratio has been since 2003 and down from a peak of 85 per cent of GDP six years ago.

Deficit grows

• $8.6 billion current account deficit.
• Equivalent of 3.6% of gross domestic product.
• Reserve Bank forecasts deficit to widen to 6.8% by next March.