The more noodles people eat, the worse the economy... Photo / Thinkstock
Welcome to Inside Economics. Every week, I answer reader questions about the economic forces shaping our world, as well as taking a deeper dive into some of the left field economic news you may have missed.
If you have a burning question about the quirks or intricacies of economics send it to liam.dann@nzherald.co.nz... or leave a message in the comments section.
We often hear economists worrying about the current account deficit. What exactly is it and how bad is it? - David R
New Zealand’s current account deficit is definitely a bad thing. Whether it is really bad or just pretty bad might depend on who you talk to. For some commentators it is the biggest economic issue facing the country, others are more relaxed about the way it goes through cycles.
We got fresh data today from Stats NZ showing the deficit has continued to improve - thanks largely to the continued return of overseas tourists.
But it is s till every big number - and shortfall - at almost $30 billion.
Essentially, the current account is a measure of the money flowing into and out of the country. It can get confusing because there’s a bit of jargon around the current account’s components... and its place as a component of New Zealand’s total balance of payments.
The easiest bit to understand is the inflow of foreign exchange we earn from exports and the outflow we spend on imports. This is a component of the current account that is also described as the trade balance.
But the current account also includes things like business profits and investments flowing in and out of the country. So, for example, the fact that the banks in New Zealand are largely foreign-owned means their multi-billion dollar profits represent a big drain on our current account.
It’s one of the reasons New Zealand is always on the back foot when it comes to trying to run current account surpluses (ie take in more money than we spend).
The grim reality we are usually in in deficit - at least since we opened the economy in the 1980s. We recorded a big surplus (the largest since 1971) in June 2020 - but that was just a weird symptom of closing the borders and locking everyone down at home. We didn’t buy any petrol and overall imports dived.
The other side of the ledger...
The current account is itself a subset of a broader measure of a nation’s financial position with the rest of the world. That’s called the balance of payments and it’s a full set of data that Stats NZ is releasing today.
The balance of payments includes the current account and the capital account. The capital account reflects the net change in a country’s foreign assets and liabilities (or debt). If we run a current account deficit (which we do), that shortfall has to be offset by borrowing, which is added to the capital account.
So basically we are a nation that lives on its overdraft and when it blows out that can be worrying. Especially to those with a conservative attitude to debt.
How bad is it really?
Current account deficits are almost always big horrible multi-billion dollar figures. But to get a sense of how bad they really are it helps to look at them as a percentage of GDP.
To stay with the personal finance analogy, that’s like weighing the size of your overdraft against your annual salary - ie your ability to service that overdraft.
International lenders (and the rating agencies that decide how risky we are to lend to) seem to stay reasonably relaxed about the big numbers because they back the fundamentals of New Zealand’s economy. We sell food to the world, and beautiful vistas to tourists. We also have a transparent and stable financial system, and a (relatively) sane political landscape. So we retain a strong credit rating.
That said, things started to look precarious early last year when the current account deficit reached 8.8 per cent of GDP. Anything above 10 per cent is considered a bad look for a country our size and might see us cop a credit downgrade - pushing up borrowing costs (which can become a downward spiral).
The current account deficit has improved slowly as tourism earnings have rebounded. For the year to September 30 2023, it was back to 7.4 per cent of GDP.
Now it is down to just 6.9 per cent.
That’s still an annual overdraft of almost $30 billion (if you really want to worry). But it’s the direction of travel that matters right now. Economists will be hoping the improvement continues - but that will be tested in today’s data.
Speaking of the current account deficit, economic research group NZ Initiative has found an unusual $52 billion discrepancy between New Zealand’s large current account deficits and its net international investment position (NIIP).
To quote Investopedia: The NIIP measures “the gap between a nation’s stock of foreign assets and a foreigner’s stock of that nation’s assets. Essentially, it can be viewed as a nation’s balance sheet with the rest of the world at a specific point in time.”
Author Bryce Wilkinson says his research “questions how New Zealand has managed to sustain its large and growing current account deficits with the rest of the world without seeing a corresponding deterioration in its net international investment position (NIIP)”.
It reveals that since March 2009, New Zealand has spent $158 billion more overseas than it has earned, but its NIIP has only fallen by $32 billion.
Some of the shortfall can be attributed to large amounts of reinsurance flowing into the country in the wake of floods and quakes.
Obviously, that’s not a promising long-term strategy. Economists allude to the “broken window fallacy” as a reminder that even though fixing broken stuff might deliver a short-term boost to GDP, it doesn’t create wealth.
Wilkinson describes the big mystery as being: ”who has been funding the $52 billion that Statistics New Zealand has had to attribute to “errors and omissions”.
“Ideally, errors and omissions should be small and average out at zero over such a long period,” he says.
“We need Statistics New Zealand to get on top of the possible answers to this $52 billion question. Who is funding what, and how sustainable is it likely to be”?
Let’s celebrate the good news when we can. Economists found all sorts of worrying inflation trends buried below the hood in Stats NZ’s Selected Price Index data last week.
The monthly index (which catches about 45 per cent of the quarterly Consumer Price Index) showed sticky inflation in accommodation costs and service-based sectors like hospitality. But basic foodstuffs are now back at normal levels of inflation. Fruit and veges saw a sharp fall. Meat, poultry and overall groceries were down on a monthly basis - adding up to annual food price inflation of just 2.1 per cent. That might just be one component of overall inflation but when it comes to the reality of everyday life, it’s a very important one!
Thanks to the global ubiquity of McDonald’s, the Big Mac Index has become a popular barometer for currency values and relative inflation in countries around the world. The Economist’s latest update has local a Big Mac costing US$5.01, putting us between Australia (US$5.07) and Poland (US$4.97) on the league table. The Swiss suffer the unfortunate pole position (US$8.17) and weirdly Taiwan - which isn’t a poor country - has the cheapest Big Macs in the world (US$2.39).
But, move over burgers, there is another even more popular food offering up a tasty barometer of economic fortune - instant noodles.
Instant noodles are now so popular, reports the FT, that if you stretched a year’s worth of production end to end, into one epic noodle, it would leave the solar system stretching out into space and beyond Pluto. That’s 6.2 billion kilometres, a fact “as miserable as it is marvellous” writes the FT’s Leo Lewis.
So what can rising and falling consumption levels of noodles tell us about the world? Well, given they are so cheap (and relatively unhealthy) the rising demand for instant noodles can be seen as “a societal and economic red flag,” says Lewis. “A signal, especially in developed countries, that something has broken or is at least under severe strain. They are an index of the primacy of need over greed in straitened times.”
In 2022, according to the World Instant Noodles Association, humanity collectively bought a record 121 billion servings of instant noodles — some 17 per cent more than in 2018.
“In countries as diverse as Nigeria, Bangladesh and Turkey, the surge has been far more acute, with increases ranging from 53 per cent to 425 per cent. That represents instant noodles doing their thing: rising from the shelves to provide affordable and durable calories to inflation-hit masses.”
The “R-word”
Are we or aren’t we and if we feel like we are... and does it really matter?
That right it’s GDP time again. On Thursday we get the number for the last quarter of 2023. Given GDP fell 0.3 per cent for the third quarter of 2023 we are well and truly on for a classic, old-school topline recession. But with the big surge in population in the past year we are certainly in a per capita recession. So does a topline recession hold much weight? Well, probably not with economists- who will be wary of future revisions if the result is marginal (in either direction).
But political debate? That’s another matter the “R” word is always a hot potato.
If you missed it here is a wrap of the economists’ forecasts and musings on what to expect.
Immigrant Song
Last Thursday we also got an update on the nation’s net migration gain for the year to January. Records fell in both directions with 257,200 migrant arrivals and 123,300 migrant departures. Those records are provisional of course and subject to revision. But for the last year or so the revisions have all been upwards. In fact, buried in the data was a record-breaking revision taking the net migration gain for the year to November of 141,400. For the record that is twice the peak we argued about saw in the John Key years. Perhaps it’s a post-Covid quirk. It will need to be or our already creaking infrastructure is going to quickly hit its limits.
Liam Dann is business editor-at-large for the New Zealand Herald. He is a senior writer and columnist, and also presents and produces videos and podcasts. He joined the Herald in 2003.
Peter Lewis is upgrading his 12 rentals but has questioned why others are exempt.