4Q CAD more than doubled on investment income

New Zealand: 4Q CAD more than doubled on investment income

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New Zealand’s current account balance deteriorated significantly in 4Q, as expected. The deficit rose to NZ$3.57 billion (J.P. Morgan -NZ$2.95 billion, consensus -NZ$1.60 billion) from NZ$1.59 billion in the previous quarter. In the year to December, the current account deficit was NZ$5.5 billion (2.9% of GDP) down from NZ$5.9 billion in 3Q (3.2% of GDP).

The main reason for the significant deterioration in the current account gap owed to the absence of large company tax transactions. In the third quarter of 2009, the marked improvement in the CAD owed to a number of one-off tax provisions that resulted in a sharp drop in income on foreign equity investment. In 3Q, Westpac made a provision for NZ$918 million, ASB made a provision for NZ$208 million, and ANZ made a provision for NZ$240 million. As a result of the near NZ$1.4 billion of company tax transactions in the banking sector, the investment income balance was a deficit of NZ$743 million in 3Q. In the fourth quarter, however, the investment income deficit was NZ$3.4 billion, an increase of NZ$2.7 billion on the previous quarter.

Without the effects of these tax transactions, the current account deficit would have been NZ$7.1 billion (3.8% of GDP) in the year to December, nearly a full percent higher. Now though, as highlighted by Statistics New Zealand, company profits “are returning to levels seen before the effects of the tax charges and the financial crisis.”

The trade balance was a deficit of NZ$224 million in 4Q, an improvement on the deficit of NZ$307 million recorded in 3Q. Exports increased a solid 8% over the quarter, easily outpacing the 1.6% rise in imports. The decline in exports owed mainly to falls in dairy products and crude oil. Imports were up, albeit mildly, thanks to an increase in values of passenger vehicle sales and sales of petroleum and petroleum products.

Attention now turns to the release of the fourth quarter GDP data tomorrow. Our forecast is for GDP growth of 0.6%q/q, a marked improvement on the 0.2% growth rate recorded in 3Q, but below the consensus forecast for a 0.8% print. The main driver of growth will again be private consumption, thanks to record-low interest rates, strong net immigration flows, and strong house price growth in the final three months of last year. Government spending should have also firmed, and a pick up in residential construction would have offset the fall in other residential building work put in place over the quarter. Net exports, though, will have been a significant drag on economic growth in 4Q.

ENDS

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