New Zealanders spend $9.4b more than they earn

New Zealand spent $9.4 billion more than it earned internationally last year as eager consumers snapped up imports made cheaper by the strong dollar and foreign-owned companies chalked up healthy profits.

The December quarter's current account deficit was smaller than September's $4 billion but was still big enough to push the annual deficit to 6.4 per cent of gross domestic product, Statistics New Zealand reported.

That is a blowout from 5.6 per cent of GDP in September.

It is the worst that ratio has been for nearly five years.

A figure of more than 5 per cent is often regarded as a red flag by the money markets, signifying that the stock of foreign claims on the economy is growing faster than the economy itself.

That situation could not be sustained indefinitely.

It has only been higher than this for four quarters in the past 10 years and economists expect it to get worse before it gets better.

Bank of New Zealand economist Craig Ebert said the deficit could hit 8 per cent of GDP by the middle of next year.

"That prospect may well prove the catalyst for what we see as an inevitable correction in the dollar this year," he said.

A deteriorating trade balance has driven the worsening current account deficit over the past three years.

It has occurred despite strong terms of trade, which mean more imports can be funded by the same quantity of exports. Over 2004, the trade deficit worsened from $700 million to $2 billion.

Deutsche Bank chief economist Ulf Schoefisch said that was due to buoyant demand in the domestic economy and the effect of the strong dollar on the international competitiveness of New Zealand businesses.

The strong economy has also boosted the earnings of foreign-owned companies in New Zealand, pushing the investment income deficit to $8.9 billion, from $6.7 billion in 2003.

That accounts for more than half of the overall deterioration in the current account over the past year.

In the latest quarter, the trade balance improved (to a $1.2 billion deficit from $1.3 billion in September), as a 7.4 per cent increase in exports outstripped a 3.2 per cent increase in imports.

But the lift in exports reflected a rebound from abnormally low dairy exports in the September quarter.

The contribution from trade in services, principally tourism, weakened however, although it remained in the black.

Visitors were fewer and stayed for shorter periods. The balance on investment income remained the largest drag on the overall result, with a net outflow of $2.3 billion despite higher returns from New Zealand investments abroad.