Current account deficit shrinks

Fairfax Media

SHRINKING: New Zealand's current account deficit has shrunk to a seasonally adjusted $612 million in the June quarter.

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Economists are questioning the drivers behind the positive current account deficit figures released today.

The current account deficit narrowed massively to just $612 million in the June quarter.

The shortfall between what New Zealand earns and spends overseas is $1.5 billion smaller than it was in the March quarter.

The main reason for the plunge was a drop in income from foreign investment in New Zealand- foreign investors, especially banks, made much smaller profits here.

A one-off tax payment by the BNZ and diminishing corporate profitability are questionable drivers behind positive current account deficit figures, say economists.

ASB chief economist Nick Tuffley said the current account deficit was headed in the right direction in recent quarters but it got a lot of help from the BNZ.

The bank's $661m tax provision for its structured finance tax case flowed straight through into the balance of payments, he said.

"Some of the recent drivers have been positive, such as lower debt-servicing costs. However, many have reflected the trials and tribulations the local economy has experienced.

"Much of the momentum from those recent drivers is tapering off. We expect the annual deficit to shrink further in the second half of 2009, but to then rebound to around 6-7 percent of GDP beyond the temporary tax blip."

Trade balances would struggle to lift further until the global economic recovery becomes further, Mr Tuffley said.

"And as New Zealand's economy recovers over the next year import demand and domestic corporate profitability will lift."

Income from foreign investment in New Zealand, which is not seasonally adjusted, fell by $1.18 billion in the June 2009 quarter, to $2 billion, its lowest level since the March 2001 quarter.

In addition to the fall in profits, interest paid to foreign investors on New Zealand's overseas debt fell by $214 million. Meanwhile, New Zealand investors' earnings from overseas were steady.

Imports of services were driven down by lower freight costs and less spending by New Zealanders on overseas trips.

The seasonally adjusted goods balance was a surplus of $822 million in the June 2009 quarter, unchanged from the March 2009 quarter.  

Exports of goods fell $771 million, mainly due to falling prices, mainly for dairy products, which more than offset an increase in export volumes.

Goldman Sachs JBWere's New Zealand strategist, Bernard Doyle, said the figures were a huge improvement but he questioned the sustainability.

"While the improvement in the current account is pleasing, the nature of the recovery gives us little confidence in its sustainability.

"Aside from the tax transaction, the bulk of the improvement is due to lower profits from the banking sector and low interest rates applied to New Zealand's international liabilities."

-with NZPA

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