New Zealand’s current account deficit remains wide at 7.6 per cent of GDP

The return of overseas tourists to New Zealand is preventing the current account deficit from sinking. Photo / Warren Buckland

New Zealand’s current account deficit remains stubbornly wide, suggesting Kiwis continue to live beyond their means.

The country spent $30.6 billion more on its imports than it earned from its exports in the year to September.

This was equivalent to 7.6 per cent of gross domestic product (GDP), according to Stats NZ.

In the year to June, the deficit was also worth 7.6 per cent of GDP.

The deficit made headlines, and attracted the attention of credit rating agencies, when it hit 8.8 per cent in the year to December 2022.

The widening of the deficit was largely put down to temporary factors – Covid travel restrictions preventing tourists and foreign students from coming to New Zealand, and demand for imports lifting as Kiwis couldn’t travel and had healthy savings, partly due to interest rates being low.

Since late 2022, all eyes have been on how quickly that deficit narrows to a more sustainable level. The fear has been that if it doesn’t track downward, New Zealand’s very strong credit rating could be downgraded, which could make borrowing more expensive.

While a deficit of 7.6 per cent of GDP is an improvement from the 8.3 per cent figure recorded in the year to September 2022, it’s still a long way off the 3 per cent level it used to hover around.

ANZ senior economist Miles Workman said New Zealand faced a “potentially lengthy” path back towards macroeconomic sustainability.

He explained this involved the Reserve Bank keeping the official cash rate (OCR) high “for as long as necessary”, and an “overdue” pulling back of government spending.

“Higher interest rates owing to a widening risk premium to access foreign capital and a lower New Zealand dollar may well prove to be necessary parts of that transition,” Workman said.

The good news is that in the year to September, the services deficit narrowed, as services exports increased by 168 per cent compared to the previous year. Tourism rebounded strongly.

Nonetheless, tourists who visited New Zealand spent less than they did pre-Covid, while the smaller number of Kiwis who travelled overseas spent the same as they did pre-Covid.

To the bad news. New Zealand didn’t manage to increase its export receipts in the year to September compared to the same period the previous year.

Meat exports fell by 12 per cent, while dairy exports increased by 3 per cent.

The largest contributor to the goods deficit widening was the increase in non-crude fuel imports (including diesel, jet fuel and petrol).

“Looking forward, cooling domestic demand and slowing global inflation should take further heat out of goods imports, but the threat of drought conditions is a worry for export volumes over the coming season,” Workman said.

“It could be a long time before New Zealand sees the goods balance back in surplus.”

The primary income deficit also widened as overseas investors earned more from their investments in New Zealand than New Zealand investors earned overseas.

Specifically, the rise in interest payments to overseas investors was more than double the rise in interest received from overseas.

Workman expected the primary income deficit to remain under widening pressure, as high interest rates add to the cost of funding New Zealand’s large net external debt position.

Publication of the current account data didn’t cause a reaction in currency markets.

Jenée Tibshraeny is the Herald’s Wellington business editor, based in the Parliamentary press gallery. She specialises in government and Reserve Bank policymaking, economics and banking.