NZ’s trade deficit forecast to be the worst among advanced economies

S&P says NZ's credit rating could be downgraded if the trade deficit doesn't narrow as expected. Photo / Michael Craig

Inflation isn’t the only thing prompting economists to back Reserve Bank governor Adrian Orr’s call for people to cool their jets or cut their spending.

The big gap between New Zealand’s export receipts and import payments is another metric ANZ chief economist Sharon Zollner believes shows we have been living beyond our means.

“The current account is screaming, ‘Cool your jets’. We cannot carry on the way we have been,” she said.

The International Monetary Fund (IMF) last week forecast that in 2023, the size of New Zealand’s current account deficit would proportionately be the largest of the world’s 40 most advanced economies.

At 8.6 per cent of gross domestic product (GDP), the IMF believed the deficit would be even greater than that of Greece, at 8 per cent, and Cyprus, at 7.8 per cent.

Last year, New Zealand’s current account deficit was $33.8 billion, which was equivalent to 8.9 per cent of GDP.

This was the largest deficit since the Stats NZ series began in 1988 and saw the IMF rank New Zealand the third worst performer among advanced economies.

Speaking to the Herald, S&P Global Ratings director Martin Foo said the credit rating agency was “alert to” the current account deficit, because it was quite a bit wider in the December quarter than expected. But he wouldn’t go so far as to say it was “concerning”.

Foo said S&P expected the deficit to narrow over the next few years.

However, he noted there was a risk of it remaining wide – at least over the next quarter or two.

“Commodity prices are a little bit weaker and tourism and other services haven’t returned to pre-Covid levels. We also expect there may be more imports related to reconstruction to Cyclone Gabrielle,” he said.

Foo said there would be “downward pressure” on New Zealand’s AA+ rating if the current account stayed weak and the Government introduced “a raft of new spending measures” at the May Budget.

A weaker credit rating could increase the country’s borrowing costs.

Nonetheless, pointing to ratings agencies’ failures to identify risks ahead of the 2008 Global Financial Crisis, Zollner believed they didn’t tend to be “very proactive”.

She said market sentiment could change quickly, so a wide current account deficit could be “one of those things that doesn’t matter until it does”.

While tourism and export education’s slow recovery following the removal of Covid-related travel restrictions are continuing to hamper the value of New Zealand’s exports, Zollner believed demand by New Zealanders for imported goods was still too high.

“We’re spending more than we’re earning,” she said.

“You can do that for a while, and at times it’s totally justified. But you can’t do it in an unsustainable way. You end up having to sell the family silver or reduce your spending abruptly when the guys with the baseball bats turn up at the door.

“There are limits to it, and we don’t want to find out where they are.”

As well as reducing demand for imports, Zollner recognised the importance of increasing the value of our exports.

“We have endless strategies for boosting our value-add exports. But at the end of the day, some of it’s under our control; some of it isn’t,” she said.

“We’re pretty much a price taker in global markets and there are plenty of challenges out there for global growth and geopolitics.”

Zollner said that while diversifying where we send our exports and reducing our carbon emissions are in our interests longer term, making these changes comes at a cost.

University of Auckland economics professor Robert MacCulloch feared the impact some of New Zealand’s key exports – dairy and tourism – were having on the environment were prompting some politicians to stymie the growth of these industries.

He believed this pointed to a deeper structural issue behind our trade deficit, noting that countries in stronger positions, like Norway and Australia, don’t hesitate extracting natural resources for export to the detriment of the environment.

MacCulloch was also wary of the impact temporary Covid-related factors had on the current account.

He believed New Zealand was suffering a “hangover”, following the Government and Reserve Bank providing the economy with too much stimulus in 2021 and 2022, all the while slowly opening the borders.

MacCulloch recognised the current account is only one economic metric that shouldn’t be viewed in isolation.

Indeed, Zollner said, “Recessions are awesome for the current account ... Is a small current account deficit good? Not if it reflects that you’re in a horrible recession.”