Narrowing deficit is tipped to be temporary

Photo / APN

The current account deficit shrank during the last three months of 2011 but economists expect the reprieve from a worsening external position to be temporary.

The gap between what New Zealand earns from the rest of the world through trade and investment and what it earns from us narrowed to $2 billion, seasonally adjusted, from $2.8 billion in the September quarter.

Two-thirds of the improvement was a $523 million increase in the trade surplus, underpinned by excellent growing conditions and a consequent jump in dairy export volumes.

The services balance, while still in deficit by $200 million, benefited from a $64 million increase in spending by overseas visitors, much of it related to the Rugby World Cup, and by a jump in exports of movie production services.

The income deficit fell by $138 million to $2.84 billion, mainly due to lower earnings by foreign investors on their investments in New Zealand. Statistics NZ said the fall was driven by the corporate sector; banking sector profits remained stable.

For the full year the deficit was $8.3 billion compared with $8.8 billion in the year ended September.

Measured against the size of the economy, it narrowed from 4.3 per cent of gross domestic product to 4 per cent.

It leaves the country's net international liabilities almost unchanged at $147 billion or 72 per cent of GDP.

That figure, already conspicuously high by international standards, is temporarily flattered by more than $12 billion of earthquake-related reinsurance claims which have yet to be settled and which in the meantime are counted as overseas assets. Excluding them, the country's net external debt would be 78 per cent of GDP. It peaked at 85 per cent in March 2009.

The current account deficit has been on a rising trend since March last year when it was 1.9 per cent of GDP.

Forecasters differ, however, on how much it will deteriorate from here.

The Treasury has it at 4.8 per cent of GDP by March next year and 6.9 per cent two years later, with costs associated with the rebuilding of Christchurch accounting for somewhere between 1.5 and 2 percentage points.

But ANZ economists expect it to remain in the 4 to 5 per cent zone this year and next year before settling close to 5 per cent in 2014.

The current account balance is also a measure of the gap between investment and saving within the economy.

"Households have started the journey to improving saving as the message of living within your means appears to be sinking in," ANZ economist Mark Smith said.

"The eventual return to fiscal surpluses will reinforce this. With debt an ugly word at present, rating agencies and overseas lenders will take a dim view if they see higher deficits eventuating and will not stand idly by."

Finance Minister Bill English took a similar line when challenged by Labour's finance spokesman, David Parker, in the finance select committee yesterday.

Parker cited the New Zealand Institute of Economic Research's view that the improvement in the current account during the recession had been due to a pullback in investment rather than an improvement in national savings, which remains near zero.

English agreed that the fundamental problem was New Zealand's unbalanced economy.

"I'm a bit more optimistic now. I think New Zealanders have got the message about saving. The figures tell us they are saving more."

Across the developed world, the model of debt-funded growth had come to an end, English said.

"I think [New Zealanders] understand that. And even if they wanted to go back to their old habits, the question is who is going to lend them the money to do it?"