Frigate steers trade deficit towards 7pc

By Brian Fallow

WELLINGTON - The current account deficit deteriorated sharply in the June quarter and economists warn that it will get worse before it gets better.

The deficit ran about 5 per cent of gross domestic product for most of last year as the recession depressed both demand for imports and the profits of foreign-owned companies in New Zealand.

But over the first half of this year, as burgeoning imports and languishing exports widened the trade gap and corporate earnings improved, the deficit has slipped back towards its range in 1997.

In the year to June the current account deficit was $6.3 billion or 6.3 per cent of GDP, compared with $5.7 billion in the year ended March and $5 billion for calendar 1998.

Yesterday's figures contain substantial historical revisions, particularly relating to December 1997 and the two following quarters.

Those revisions made past deficits smaller. For example, the March 1999 deficit, reported three months ago as 6.6 per cent of GDP, has been revised to 5.8 per cent.

The revision of the historical track has tended to pull forecasts of the peak in the current account cycle up by 0.5 per cent or so.

"Even with that liposuction, these are still ugly numbers," said National Bank chief economist Brendan O'Donovan.

Both private sector economists and the Treasury expect the deficit to widen, partly because of the import of the $600 million second Anzac frigate in October. Estimates of the peak range from 6.5 to 7.5 per cent of GDP, with the consensus around 7 per cent.

The June quarter deficit, seasonally adjusted , was $2.1 billion, falling out of the $1 billion to $2 billion band the quarterly figure has occupied for the previous five years (apart from the June 1997 quarter when the first frigate was bought).

The June quarter is the peak of the export season, but exports have been weak because of poor commodity prices and volume constraints flowing form the summer's drought. The quarter's lamb kill, for example, was 20 per cent down on last year.

Imports meanwhile have continued to grow strongly. Receipts from tourism were down from the record heights of the March quarter but at $791 million were up $103 million on the June quarter last year.

The biggest drag on the current account, however, is the investment income balance which is the earnings on the $100 billion or so of overseas investment in, and lending to, New Zealand, offset by the return on New Zealand investment offshore.

The investment deficit of $1.9 billion was worse than the March quarter's $1.7 billion and the $1.3 billion shortfall in June last year.

The latest data continue to show a low level of retained earnings by companies more than 25 per cent owned offshore. Over the three years to June 1999 they have collectively earned $10.2 billion in profits, of which $9.5 billion has been distributed in dividends and $700 million retained in the companies concerned - a payout ratio of 92.5 per cent.

Apart from a short-lived rally in the kiwi dollar on the strength of the initial headline number, which because of the revisions was slightly better than forecasters had picked, the markets shrugged off yesterday's data.