NZ's current account deficit narrowed

June 28, 2007

New Zealand economic update

Current Account New Zealand's current account deficit narrowed to 8.5% of GDP (from 9.0%)

New Zealand current account deficit (CAD) narrowed to NZ$2.217 billion in 1Q, from NZ$3.944 in 4Q, as export volumes for both goods and services rose over the quarter. The annual deficit narrowed to NZ$13.9 billion in 1Q (8.5% of GDP), from NZ$14.5 billion (9.0% of GDP) in 4Q, and is an marked improvement from the NZ$14.9 billion blow-out recorded in 1Q06 (9.6% of GDP).

The improvement of the year was driven by a rapid increase in good exports, as surging dairy prices stimulated record volumes throughout the year. Service exports have also surprised on the upside given the elevated level of NZD. The income balance improved as income earned on foreign investment in New Zealand fell.

The goods and service balance posted a healthy NZ$594 million surplus in 1Q, up from the NZ$283 million surplus recorded in 1Q 2006. Exports of goods were up sharply, and service exports are holding in. Tourism flows, for example, are holding up despite the high NZD, which has been making fresh post-float highs since the end of 1Q.

The flow of tourism rose 4% compared to the March 2006 quarter, and was seemingly unaffected by the 10% spike in NZD during that period. Going forward, the terms of trade boost - which is being driven by surging dairy prices, a pick up in timber prices (thanks to tax changes in Russia) and a likely rise in meat prices (after Australia's droughtinduced culling comes to an end) - will help drive export volumes into 2008.

The high NZD, however, remains a concern for exporters not benefiting from rising commodity prices. The income balance improved markedly over the quarter as income earned by foreigners waned. The level of income flowing overseas, thanks to New Zealand's appetite for debt, however, keeps the income side of the equation in worrying deficit (chart).

According to Statistics NZ, income earned by foreign investors from New Zealand investments was NZ$1.6 billion higher in the March 2007 year compared with the March 2006 year. This was partly offset by a $0.9 billion rise in New Zealand's income earned from investments abroad.

New Zealand’s net international liability position was NZ$145.0 billion, an increase of $15 billion over the year. Of the increase, NZ$11.5 billion is an increase in net overseas debt, as a result of the banking sector increasing its borrowing from overseas.

The concerning fact remains, however, even with surging commodity prices and the likely kick to agricultural exports coupled with slow import growth as consumption growth cools - New Zealand's current account deficit will struggle to break below 7% of GDP for the foreseeable future due to an insatiable appetite for foreign debt and rising global interest rates.

ENDS

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