In a nutshell, it reflects the fact New Zealanders are living beyond their means.
On the upside, tourism rebounded in the year to June. Overseas visitors increased their spending in New Zealand by almost twice as much as Kiwis increased their spending overseas.
This saw the value of the country’s services exports rise by more than its imports.
Offsetting this, New Zealand’s goods imports increased by more than its exports.
Dairy exports rose, but so too did both the volume and price of imported fuel.
Furthermore, New Zealand paid more to overseas investors, as interest rates rose, and the Government issued more debt.
ANZ senior economist Miles Workman believed the size of the current account deficit put New Zealand in a vulnerable position.
“What if the international tourism recovery stalls because the global economy splutters?” he questioned.
“What if China’s economy goes through a harder landing than anticipated and demand for our goods exports [falls] off a cliff? What if there’s a drought this summer, curtailing primary production? What if the next government loosens fiscal settings too much?”
Workman said the situation could weaken the New Zealand dollar. This would make imports more expensive, exacerbating inflation and putting upward pressure on interest rates.
Overseas investors could also demand a higher return from the New Zealand Government, businesses, and banks they lend to, if they perceive the country to be higher risk. Again, this would lift interest rates.
“By our estimates, New Zealand’s external imbalance has already breached levels that sovereign credit rating agencies would deem unsustainable, and if things don’t improve fast enough New Zealand could be downgraded,” Workman said.
S&P credit rating agency recently said it could lower New Zealand’s AA+ credit rating if the country posted “persistently weak current account deficits”.
However, its “base case” was for the deficit to narrow “steadily” to 4.2 per cent of GDP by the year to June 2026.
“New Zealand’s monetary policy flexibility, wealthy economy, and institutions that are conducive to swift and decisive policy action offset weaknesses associated with the country’s largest external balances,” S&P said.
The combination of lots of Reserve Bank and government stimulus during the peak of the pandemic, coupled with restricted international travel, widened the deficit.
Workman said, “While the Government’s books are in good shape by international standards, New Zealand’s books as a whole are not, and the change in fiscal stance over the past few years has been a key ingredient in the deterioration.”
Nonetheless, he expected high interest rates to squeeze Kiwis’ budgets to the extent demand for imported goods falls.
While he saw the return of foreign tourists and students boosting the country’s export receipts, he worried about the price of New Zealand’s dairy exports falling, and the end of domestic fuel refining, combined with high global fuel prices, adding “significant widening pressure” to the country’s goods balance
BNZ senior economist Craig Ebert also worried about the high rates of interest New Zealand is paying to overseas investors.
“New Zealand’s net foreign debt, proportionate to the size of the economy, is nowhere near as high as it was as around the time of the Global Financial Crisis. But it still entails a decent amount of servicing going forward,” he said.
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Although Ebert was relieved the deficit continued narrowing in the June quarter, he said the results were “hardly anything to celebrate”.
Workman concluded, “New Zealand has a potentially lengthy, and not very fun, path towards macroeconomic sustainability to walk.”
Meanwhile Westpac senior economist Nathan Penny expected the deficit to settle at a higher level than in previous cycles, as environmental constraints limit growth in New Zealand’s goods export income (relative to growth in the rest of the economy).
Jenée Tibshraeny is the Herald’s Wellington Business Editor, based in the parliamentary press gallery. She specialises in government and Reserve Bank policymaking, economics and banking.
