KEY POINTS:
The current account deficit has narrowed for the first time in three years but economists warn further improvement is not assured, with the economy still grappling with the resurgent local currency and consumer demand.
The current account, also known as the balance of payments, measures New Zealand's dealings
with the rest of the world. In the year to September it was running at a deficit of $14.42 billion, a figure economists estimate to be equivalent to 9.1 per cent of gross domestic product.
That is an appalling number for any country but it was still better than expected and is an improvement on the $15.14 billion or 9.6 per cent of GDP for the year to June.
It is also the first time the annual deficit has improved since March 2003.
Westpac chief economist Brendan O'Donovan said the improvement reflected the kiwi dollar's dip between March and October this year. "With the currency fast regaining 2005 levels, further narrowing of the current account deficit is likely to be muted."
In fact the forex market reacted to yesterday's favourable data by bidding the kiwi dollar, already at an 11-month peak, even higher. Trading at around US69.40c before the news, it closed at US69.88c last night.
BNZ economist Stephen Toplis said the data was encouraging as it may have indicated the current account deficit had peaked in the June quarter. BNZ forecasts it to fall to 8.8 per cent of GDP in the December quarter and 7.5 per cent by the end of next year.
However those forecasts were based on what now look like "heroic assumptions" - that the New Zealand dollar would fall sharply next year, that key export earner tourism would pick up as a result, that domestic demand cooled and that the international investment income balance stabilised near current levels.
"The path ahead for the current account balance is prospectively as rocky as the road faced by nearly every other economic aggregate in New Zealand," said Toplis.
ANZ economists said recent appreciation in the New Zealand dollar and gathering momentum in the domestic economy meant there was still scope for further deterioration in the balance of payments.
ANZ expected the December quarter current account deficit to rise to around 9.5 per cent of GDP.
Rating agency Standard & Poor's said the data was positive, but would not affect its rating outlook. "We regard the current account as being significant but offset by the Government's strong fiscal position."
Statistics NZ said the narrower September year deficit was mainly due to a $1.4 billion increase in the value of exports, partly offset by a $700 million increase in the value of imports.
Over the September quarter, the deficit was $4.58 billion with the investment income balance much stronger than expected. The amount Kiwis earned on overseas investments rose by 65 per cent compared with a year ago while investment income payments to foreigners fell sharply.
However the stock of New Zealand's overseas investments actually fell and the improved investment income was a result of higher returns on some assets and was unlikely to be sustained, said Westpac's O'Donovan.
Meanwhile, rising domestic demand was likely to see investment income paid to foreign investors increase over coming quarters.
At the end of September net foreign claims on the New Zealand economy totalled $137 billion including $121.2 billion in debt.
