Current account deficit blows out

Last updated 05:00 21/03/2013

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The current account deficit has risen to a bigger-than-expected 5 per cent of gross domestic product and is expected to worsen further into the "watchzone" towards 6 per cent, economists say.

A wider current account deficit is seen as a risk that could push down the New Zealand dollar.

The deficit could worsen as the drought hits farm export volumes, imports rise as the Christchurch rebuild gains steam and foreign-owned companies earn greater profits as the domestic economy gained ground, economists said.

At 5 per cent of gross domestic product, the deficit is the highest since 2009, but well below the peaks around 9 per cent last decade.

But the deficit was now getting to levels where it could start attracting the attention of international investors.

Statistics NZ figures out yesterday showed the current account deficit was $2.7 billion in the December quarter, leaving the annual deficit at $10.5b.

The annual deficit was slightly worse than market forecasts of about $10.1b. A current account deficit means the rest of the world earned more from New Zealand than New Zealand earned from overseas.

Part of that larger deficit reflected foreign-owned companies in New Zealand earning more and getting a better dividend as the economy improved in the December quarter.

But the headline deficit has worsened from the 4.7 per cent of GDP in the September year, and widened from about 4 per cent a year ago because of lower dairy prices last year.

ANZ Bank economists said the latest quarterly deficit was bigger than expected and "moving back into the watchzone".

But future deficits should be capped at below 6 per cent of GDP, with a lift in export prices and government belt-tightening, combined with the impact of the drought on net exports and the high New Zealand dollar and more imports as business investment picked up.

While the currency was not as high as it was in the middle of February, "it remains a considerable roadblock" to exports.

"A lower New Zealand dollar remains the release valve," ANZ said.

Westpac Bank economists said the wider deficit was a worry, reflecting a two-speed economy, with rising domestic demand but a struggling export sector facing a high currency and now drought.

This year the goods and services balance was expected to remain in deficit and widen, Westpac said.

ASB Bank economists said the drought was likely to have a mixed impact on the trade deficit in the coming year, with lower production volumes but higher dairy prices.

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