The gap between what New Zealand spends and what it earns in its dealings with the rest of the world widened in the June quarter, driven by higher profits for foreign-owned companies, especially banks.

The current account deficit was $1.8 billion in the quarter, making $10 billion for the year, up from $1 billion and $9 billion respectively in March.

When adjusted for seasonal effects, the balance on goods was a surplus of just under $300 million, up from just over $100 million in the March quarter but down from a surplus of $1 billion in the June quarter last year.

Oil imports dropped by nearly $500 million or 30 per cent in the quarter, reflecting lower volumes, which more than offset a drop in exports, led by a $166 million decline in dairy exports.


A surplus on the trade side was dwarfed by the deficit in investment income, which was $2.8 billion in the June quarter, up from $2.3 billion in March. A $400 million rise in the profits of foreign-owned companies, principally the banks, explained most of the increase. The outflow of profits repatriated as dividends increased by $500 million.

The $10 billion current account deficit for the full year is equivalent to 4.9 per cent of gross domestic product, the worst that ratio has been for two years.

It pushed the country's net international investment position - foreign claims on the economy, mainly debt, offset by New Zealand investment abroad - to $149 billion or 72.6 per cent of GDP. But that number is flattered by statisticians treating $12.8 billion of outstanding earthquake-related reinsurance claims as foreign assets until they are paid out. Excluding them, net foreign liabilities would be 78.9 per cent of GDP.

ANZ economist Mark Smith said the key driver of rising annual current account deficits had been the continued worsening of the goods trade surplus. The latest year's $2 billion surplus was the lowest in three years and reflected less favourable terms of trade, strengthening demand for imports and the high New Zealand dollar.

ASB economist Jane Turner expects the deficit to widen further over the coming year to 6.5 per cent of GDP as the decline in export commodity prices over the past year or more works its way through the trade balance and ongoing recovery in the domestic economy lifts the outflow of investment income.

"A wider deficit over the next year will highlight New Zealand's vulnerability to external financing," Turner said.

However there were encouraging signs a gradual rebalancing of the economy was taking place.

"The private sector via the financial system is gradually reducing its net foreign debt. The Government is still increasing its use of foreign debt, but that will also change in the long term once budget surpluses are eventually restored," she said.