KEY POINTS:
The gap between what New Zealand spends overseas and what it earns is shrinking.
High world prices for butter and cheese, and the first flush of oil from the Tui oilfield, gave us a stellar quarter for exports, helping reduce the balance of payments deficit by $489 million
to $3.09 billion, seasonally adjusted for the December quarter.
Measured against the size of the economy, the rolling annual deficit was the lowest for two- and-a-half years, falling to $13.8b or 7.9 per cent of gross domestic product (GDP).
The size of the deficit relative to the economy hit a peak of 9.7 per cent of GDP in March 2006, falling to 8.6 per cent for the year ending December 2006.
BNZ chief economist Tony Alexander said the balance of payments should get better over the next year, probably falling below 7 per cent of GDP.
But the deficit was still high by historical and overseas standards. By comparison, the US current account deficit was 4.9 per cent of GDP at the end of last year. New Zealand's average ratio for the past 23 years has been just under 5 per cent.
Alexander said dairy and oil exports would keep improving the picture this year, while the predicted slowdown in the domestic economy would help reign in our appetite for imports.
His comments were backed by a gloomy Westpac McDermott Miller consumer confidence survey, showing consumer confidence for the March quarter plunging to its lowest point in a decade. Consumer confidence was measured at 96.5, compared with 117.7 a year ago. Anything below 100 shows net pessimism on the part of consumers, and may point to a slowdown in retail spending.
The current account, also known as the balance of payments, measures all New Zealand's transactions with the outside world. The deficit in the current account is how much our demand for resources exceeds domestic supply.
Last quarter, the good news from exporters was offset by a rise in the cost of imports, mostly due to high petrol prices. The balance of travel payments was also down, dropping 10.6 per cent as Kiwis flocked overseas for the Rugby World Cup. Our overall deficit for the December quarter was financed by a net inflow of capital of $3312m.
Tighter lending policies in the wake of the credit crunch saw more short-term borrowing by New Zealand banks. Our banks borrow overseas for about a third of the money they lend out.
The long-term effect of all this borrowing is a steadily growing international debt.
The country's net international liability is now $152.4b - $1.7b more than at the end of September and nearly $10b up on a year ago.
Alexander said New Zealand's net international investment position, or the balance between what we own offshore and what we owe, would continue to get worse in the next few years.