Deficit may be highest since 1986

Slowing exports and rising oil prices look set to push up New Zealand's second-quarter current account deficit to levels not seen for 20 years.

Statistics New Zealand will release the latest current account figures, also known as the balance of payments, on Wednesday.

The data measures all of the country's transactions with the outside world.

The March quarter deficit was $1.42 billion, which amounted to 7 per cent of gross domestic product (GDP).

Ten economists polled by Dow Jones forecast the median quarterly deficit for June would swell to $2.6 billion, or 7.5 per cent of GDP for the June quarter.

The last time the current account deficit was higher as a proportion of GDP was in March 1986, when it was at 8.9 per cent. Any level above 5 per cent of GDP is usually an alarm signal to international investors.

In his quarterly Monetary Policy Statement released at the end of last week, Reserve Bank Governor Alan Bollard projected the deficit would hit 7.25 per cent by the end of 2006 and stay there for a couple of years.

"We believe it is not sustainable at that level - it needs to retract somewhat," he said.

He said the high deficit partly reflected strong investment in productive resources.

"However, it is also a reflection of unprecedented dis-saving by households, which is not expected to be sustained in the medium term," Dr Bollard said.

Despite the size of the deficit, he detected no particular concern in financial markets.

Deutsche Bank chief executive Ulf Schoefisch said escalating oil prices were sucking money out of the economy at a rapid rate.

"New Zealand is spending $1 billion more on oil this year than last year. That money has to come from somewhere," Schoefisch said.

The price of a barrel of crude hit a record high of US$70.85 ($100.55) last month in the aftermath of Hurricane Katrina in the United States.

Prices have since settled back to around US$60 a barrel - still about double the asking price 12 months ago.

Apart from rising oil prices, the downturn in the export sector was also playing a negative role.

"It's pretty appalling what's happened on the export front, how the data has come out recently. It doesn't look all that flash," Schoefisch said.

The data he was referring to was the July trade deficit, which was the largest July trade deficit on record at $617 million.

The July year deficit was $5.4 billion - $2 billion bigger than a year earlier.

The export outlook is not encouraging.

According to the Reserve Bank, non-commodity export growth is expected to continue to slow, affected by the high exchange rate and a slowdown in global growth.

The Reserve Bank expected the sector's export growth to fall from 10 per cent in 2004, to close to zero in 2007.

Agricultural exports have been dampened recently by weather-related disruptions to production.

Forestry sector exports are expected to remain weak, as the industry continues to be plagued by weak world prices, high shipping costs and the rampant NZ dollar.

Growth in exports of services has fallen sharply in recent quarters as the high exchange rate continues to deter tourist spending.