Spending gap turns into $10b chasm

The gap between what we spend and what we earn internationally has widened to Grand Canyon proportions - with the current account deficit for the year to March topping $10 billion for the first time.

The annual deficit was pushed to $10.3 billion by the combined effect of weaker export volumes, declining earnings from tourism and bumper profits for foreign-owned companies.

Measured against the size of the economy, it is 7 per cent of gross domestic product - the worst that ratio has been since 1986.

ANZ economist Sean Comber described the result, which was worse than any market economist had forecast, as "another shocker, which will throw market attention back to the sustainability of New Zealand's recent spending-driven growth surge".

The kiwi dollar fell two-tenths of a cent against the US dollar on the news, well within its normal trading range over the past month.

Bank of New Zealand economist Craig Ebert said: "It's an ugly number. New Zealand has run large external deficits since Adam was a cowboy but what's new is a gaping deficit in the trade accounts, especially in volume terms."

Trade in goods was $2.4 billion in the red for the year ended March (up from $2 billion in calendar 2004), even though the terms of trade (the ratio of export to import prices) were the most favourable for 30 years.

That was offset by a $1.2 billion surplus in services, down from a surplus of $1.4 billion in calendar 2004. Although more tourists came, stays were shorter and they spent less a day, Statistics New Zealand said.

Ebert said the tourist sector was directly exposed to the effects of the strong kiwi dollar, with no buffer of world commodity prices.

"It is also relatively labour-intensive so will be feeling the effects of wage pressure, as well as higher fuel costs."

The big negative, as usual, was the investment income balance, a deficit of $9.4 billion, continuing the trend of rapidly widening deficits during the past year.

Over the past four quarters, income earned by foreign investors has varied between $2.8 billion and $3.2 billion a quarter, with the lion's share coming from the return on equity investments (even though debt is a much larger share of total foreign liabilities).

In the March quarter, at least 68 per cent of those profits were reinvested in the companies concerned.

But with the economic cycle widely seen as having peaked, economists expect the cyclical peak in corporate profitability to be not too far off too. However, many expect the overall current account deficit to get worse before it gets better.

UBS chief economist Robin Clements said the outlook for exports was "not exactly flash" with pressure from the exchange rate, slower global growth and the likelihood of softer commodity prices.

He said offsetting that would be softer domestic demand curtailing growth in imports.

Foreign claims on the economy, equity and debt, net of New Zealand investment abroad was minus $123 billion, or $30,000 a head, a debt costing 3.3 weeks' worth of the economy's output over the year to service.

Getting worse

The balance of payments has been getting worse since 2001.

The trade gap widened despite good export prices.

Tourists are spending less.

Foreign-owned companies have been earning good profits.