The current account deficit is expected to come in at 8.7 to 9 per cent of GDP in the year to March. Photo / Alex Cairns
The current account deficit is expected to come in at 8.7 to 9 per cent of GDP in the year to March. Photo / Alex Cairns
Stats NZ data due out on Wednesday morning is expected to illustrate how we’re continuing to live beyond our means, importing record amounts more than we’re exporting.
Economists believe the data will show New Zealand’s current account deficit remained wide by both historic and international standards in the year toMarch.
In the year to December, the deficit sat at $33.8 billion, which was equivalent to 8.9 per cent of gross domestic product (GDP).
This was the largest deficit since the Stats NZ series began in 1988, and saw the International Monetary Fund (IMF) rank New Zealand the third-worst performer among advanced economies.
ANZ economists forecast the deficit narrowing to 8.7 per cent of GDP in the year to March. Meanwhile, BNZ and ASB see it hitting 9 per cent.
Either way, the consensus is that the data will show that households and the Government need to save more and spend less to rebalance the economy post the initial Covid response.
“New Zealand is running the dreaded twin deficits - current account and fiscal,” ASB chief economist Nick Tuffley said.
Meanwhile, ANZ senior economist Miles Workman said, “We’ve been living beyond our means, becoming more dependent on foreign capital in the process.
“The path to something more sustainable isn’t a fun one (as it involves weaker domestic demand), but medium-term macroeconomic stability is at stake.”
ANZ senior economist Miles Workman.
Breaking down the components of the current account, Workman explained the difference between the value of the goods New Zealand imports and exports has increased on the back of the Government and Reserve Bank overstimulating the economy and therefore creating more demand for goods.
The closure of the oil refinery at Marsden Point also means New Zealand has a greater dependence on refined fuel imports.
As for the export of goods, this has been hampered by bad weather, labour shortages and logistical challenges.
Workman went on to explain that while the services balance tends to be in surplus, it’s in deficit thanks to Covid-era border restrictions impacting New Zealand’s tourism and education exports.
“The good news is that services exports are now recovering … But there’s a decent way to go before services exports are outpacing imports once again on an annual basis,” he said.
“Looking forward, we see the annual current account deficit narrowing from here as demand for imports softens and the recovery in travel-related exports continues.
“But higher global interest rates are expected to become a significant offset, keeping the income deficit under widening pressure.”
What’s the problem with New Zealand importing so much more than we’re exporting?
Excess economic demand in relation to supply is contributing towards inflation.
A wide current account deficit could also affect New Zealand’s strong credit rating, which could make it more expensive for the country to service its debt.
Speaking to the Herald in April, 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.
He wouldn’t go so far as to say it was “concerning” but said there would be “downward pressure” on New Zealand’s AA+ rating if the current account remained weak and government spending elevated.
While Foo believed there was a risk of the deficit remaining wide in the short-term, he expected it to narrow over the next few years.
The Treasury, at the May Budget, forecast the current account deficit slowly narrowing to 4.6 per cent of GDP by 2025.
This would still be wider than where the deficit has averaged since 1988, at 3.7 per cent.
“The forces driving the deterioration in the current account deficit are beginning to reverse, led by the recovery in tourism,” the Treasury said.
“In addition, declining global inflation, particularly for commodities including oil and food, is helping to lower import values.
“Domestically, the anticipated slower pace of demand growth will increasingly constrain the appetite for spending on imported goods and services over the next year or so.”
