Imports plummet, current account deficit narrows

New Zealand's current account deficit narrows due to plummeting imports

• Current account deficit fell in 1Q09
• Huge fall in imports a sign of ailing domestic demand
• Despite positive contribution from trade, two more quarters of recession expected

In the year to March, New Zealand’s current account deficit fell to NZ$15.2 (non-seasonally adjusted) from a record high of NZ$16.1 billion. As a share of GDP, the deficit moderated to 8.5% from a colossal 8.9% in the December quarter. In 1Q alone, the deficit fell dramatically to NZ$1.2 billion (J.P. Morgan -NZ$2.1 billion, consensus -NZ$1.3 billion), from NZ$4.0 billion in 4Q.

The trade balance burst into surplus (NZ$1.3 billion), owing to plummeting goods imports, which were down from NZ$12.1 billion to NZ$9.5 billion. The petroleum, petroleum products, transport equipment and motor vehicles components experienced the largest decline in imports. The moderate fall in goods exports was due to reduced export prices. While the positive contribution from net trade is good for GDP growth, the improved picture largely reflects weak domestic demand. The income and transfers balance essentially was unchanged from the previous deficit, as decreased investment earnings in New Zealand and overseas mostly offset each other.

The moderation in 1Q notwithstanding, New Zealand’s huge external imbalance leaves its economy more vulnerable than most, owing to the enormous amount of foreign capital needed to make up for the deficiency of domestic savings. We expect a material improvement in the deficit in the medium term, however The CAD should narrow thanks to even weaker imports, less private sector borrowing, and a rise in the household saving rate.

The market’s focus now turns to tomorrow’s GDP report. Our forecast is for the economy to have contracted 0.4%q/q in the March quarter, marking the fifth straight quarterly decline. A solid contribution from net exports probably prevented a sharper fall in GDP, government spending should have risen, and investment probably held up relatively well. Private consumption, though, should have fallen markedly, after a record fall in retail sales volumes in 1Q.

We forecast that the economy will contract again in the second and third quarters of 2009, before expanding modestly in 4Q. The significant monetary and fiscal policy easing that has been delivered should help New Zealand eventually recover from this prolonged recession, but growth will remain below trend for some time.

ENDS

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