Current account deficit at 20-year low
New Zealand's annual current account deficit reached its lowest level in more than two decades in the year to March, but the improving trend might be just about over.
Statistics New Zealand (SNZ) figures out today showed the annual current account deficit for the year ended March was $4.5b, equal to 2.4 percent of GDP, the lowest since the year ended September 1989.
It was down from $5.3b or 2.9 percent of GDP in the year to December, and from $14.6b or 7.9 percent of GDP a year ago.
The seasonally adjusted current account deficit of $1.29 billion in the March quarter was a $1.63b smaller deficit than in the December quarter.
Unadjusted for seasonal effects, the actual quarterly current account balance was a surplus of $176 million, SNZ said today.
The fall in the quarter's seasonally adjusted deficit was due to a stronger trade balance, largely due to stronger dairy prices, while the combined investment income and transfers deficit was smaller, partly due to stronger income earned overseas by New Zealand-owned foreign entities.
ASB economists said the annual current account had narrowed dramatically from its peak in December 2008 of $16b, but much of the shift had been cyclical and a result of recession.
"Weak import demand helped the trade balance improve to a surplus position. Meanwhile, weak profitability of foreign-owned businesses resulted in reduced outflow of investment income," the ASB economists said.
As the New Zealand economy entered its second year of recovery, it appeared the underlying improvement in the current account had peaked.
Strengthening import demand would erode the trade surplus over the next year, while stronger profitability associated with a stronger economy would see the investment income deficit expand.
ANZ chief economist Cameron Bagrie and economist Mark Smith said today's numbers pointed to a much needed rebalancing of the economy.
"However, we believe the trough in the current account deficit is at hand, and that the deficit will start to head towards 4 percent of GDP by the end of the year as the economy continues to recover."
At the heart of the current account story was a structurally large investment income deficit, reflecting a lack of private sector, and more recently government, saving.
For the March quarter the investment income deficit was $2.27b, a fall of $989m in the size of the deficit from the previous quarter.
The ANZ economists said the investment income deficit situation was not helped by the fact New Zealand-owned assets offshore earned a substantially lower rate of return - 2.2 percent annualised in the first quarter - than the 4 percent annualised earned by foreign-owned assets in this country.
Deutsche Bank chief economist Darren Gibbs did see some possibility of further improvement in the annual current account deficit in 2011, after widening a little as one-off bank receipts rolled out of the calculations.
But he expected a gradual deterioration to emerge in 2012, taking the deficit back towards 4 percent of GDP.
Deutsche Bank was not nearly as bearish as the Reserve Bank about the likely deterioration in the current account balance during the next couple of years, Mr Gibbs said.
As at March 31, New Zealand's net international debtor position was $166.7b or 88.9 percent of GDP. That was $1.6b smaller than the position at December 31 of $168.3b or 90.6 percent of GDP.
The fall in the net international debtor position was the second consecutive quarterly decline, which last happened nine years ago.
Goldman Sachs JBWere economist Philip Borkin said that while the improvement in the net international investment position - from a peak of -94.2 percent in March 2009 - was a positive development, it remained high by international standards and was this country's Achilles' heel.
While that largely centred on the Australian-owned banking sector, reducing risks somewhat, the ongoing debt servicing costs alone would remain a key requirement hanging over the country's future economic performance.