Deficit expected to worsen

05:12, Jun 20 2012

The annual current account deficit has widened to 4.8 per cent of GDP and economists expect it will keep getting worse, with sharply falling export prices and rising demand for imports.

The current account records the balance of trade between New Zealand and the rest of the world for goods and services, net investment income and net transfers.

ANZ economists said the 4.8 per cent figure was worse than market expectations and given the worsening trade position with lower commodity prices, the deficit was trending closer to the 5 per cent of GDP "danger zone" for international lenders.

The falling value of dairy exports and a drop in spending by tourists after the Rugby World Cup have seen the current account deficit worsen by $600 million to $2.8 billion, seasonally adjusted, for the March quarter.

That takes the annual deficit back up to $9.7 billion for the year to March 31 or 4.8 per cent of GDP according to latest Statistics NZ figures out earlier today. The deficit was equal to 4.2 per cent of GDP in the December year.

The current account deficit had been gradually widening in the past couple of years, but ASB Bank said the pace would pick up in the next year.

A sharp fall in export commodity prices would hold back export incomes, when domestic demand growth would lift, in part due to the Canterbury rebuild and because of better profits for foreign owned companies.

ASB expected the deficit to peak at above 6.5 per cent of GDP around the middle of next year, but later on, a recovery in commodity prices should help constrain the deficit. There were already tentative signs of commodity prices steadying, ASB said.

Green Party leader Russel Norman said the latest current account figures showed New Zealand sent $9.7 billion more overseas in profits, interest on debt and payments for imports than it got back in export receipts and returns on offshore investments.

Budget night forecasts said the deficit would be $8.7 billion or 4.2 per cent of GDP.

"The Budget is less than a month old and already the country's a billion dollars worse off than National promised," he said. The latest blow-out in the deficit showed the National government were hopeless economic managers, Norman said.

Statistics NZ said the March quarter deficit worsened as falling sales of dairy products, crude oil, and fruit drove goods exports down, while imports of crude oil increased.

"The value of dairy exports fell despite an increase in volumes, as dairy prices fell for the third quarter in a row," balance of payments manager John Morris said.

Spending by visitors to New Zealand also fell as visitor numbers dropped following the Rugby World Cup.

Profits earned by foreign-owned companies in New Zealand fell, partly offsetting the falls in exports of goods and services.

Despite the fall in profits, earnings reinvested in New Zealand by these companies increased $400 million over the quarter.

In contrast, dividends paid to overseas investors by these companies fell $800m, to the lowest level in over seven years.

The year-end deficit increase to $9.7 billion was mainly due to higher profits earned by foreign-owned banks and increased imports of petroleum and petroleum products.

Services imports and transfer payments to overseas also increased over this time, due to the rising costs of reinsurance in the latest year.

"Reinsurance premiums rose following the Canterbury earthquakes, resulting in a $0.4 billion increase in insurance payments during the year," Morris said.

Despite the current account deficit in the March quarter, New Zealand's net international liability position decreased to $143.2 billion (70.9 percent of GDP) at 31 March 2012, from $146.3 billion (72.9 percent of GDP) at 31 December 2011.