Deficit expected to top $5 billion

The Reserve Bank monetary policy statement forecast a current account deficit of 3.1 per cent of the June 2010 year. Photo / Dean Purcell

Balance of payments figures due on Wednesday are expected to show the annual current account deficit, which has narrowed rapidly over the past two years, widening again.

The current account is a measure of how much more the country spends than it earns in its dealings with the rest of the world.

The median forecast among market economists polled by Reuters is for a deficit of $5.3 billion over the year ended June, equivalent to 2.8 per cent of gross domestic product.

That compares with 2.4 per cent in the year ended March - a 21-year low - and 5.6 per cent in the year to June 2009.

Westpac economist Michael Gordon said the goods trade balance had improved dramatically over the past two years.

"For the June quarter we expect the largest seasonally adjusted surplus on record, going back to 1987," he said.

"Import volumes, which fell steeply during the recession, are now growing faster than export volumes. But to date this has been more than offset by improving prices for our commodity exports."

The terms of trade, which is the ratio of export to import prices, improved 2.1 per cent in the quarter and is just 3 per cent shy of the 34-year high reached in March 2008.

However, the current account - or investment income - deficit by contrast is widening, Gordon said, mainly because of improved profits for foreign-owned companies.

Over the past year the investment income deficit has been flattered by large one-off tax bills hitting the bottom lines of the big Australian-owned banks. As they drop they will make the investment deficits look correspondingly worse than the underlying trend.

The Reserve Bank in last week's monetary policy statement forecast a current account deficit of 3.1 per cent of the June 2010 year, climbing to 4.8 per cent by March 2013. That would still be well below the peak of 9 per cent reached in the first half of 2006.

It sees growth among trading partners slowing through the second half of this year as temporary support from fiscal stimulus and the rebuilding of inventories fades.

But beyond that the bank expects a return to "robust" growth, supported by strong performances in Australia and emerging Asia.

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

Viewed in that light the progressive widening of the current account deficit the Reserve Bank forecasts is driven by a pick-up in investment by the business sector. Households' net saving rate is expected to improve, but to remain well short of what is needed by the household sector.

Decades of persistent current account deficits had pushed the stock of foreign claims on the economy (mainly debt rather than equity), net of New Zealand investment abroad, to $167 billion or 89 per cent of GDP by March this year. That is the same territory as Portugal, Ireland, Greece, Spain and Hungary. The Treasury forecasts the ratio to deteriorate to 100 per cent of GDP by 2014.