Rising exports and tourists spending more in New Zealand have seen New Zealand's current account deficit improve in the March quarter, but the picture is likely to worsen next year.
The current account deficit is 4.8 per cent of GDP for the March year, compared with 5 per cent for the December year, according to Statistics New Zealand.
The current account includes the net balance of goods and services, net investment income and net transfers between New Zealand and the rest of the world. A current account deficit means New Zealand is spending more than it earns and borrows to finance the spending.
Bank economists had expected the deficit to narrow in the March quarter, as dairy export volumes rose, leading to a better goods balance and a smaller shortfall on services because spending by foreign tourists in New Zealand was stronger than expected.
The goods surplus could improve even more in the coming year, because of higher dairy prices. Despite a dip in prices in the past couple of months, dairy prices are still almost 60 per cent above levels of a year ago.
That could see the deficit improve in the short term, ASB economists said.
Earlier this year, there had been concerns that the deficit could worsen further into the international "watchzone" toward 6 per cent of GDP, but Westpac economists said the deficit should probably get a "free pass" for the rest of the year.
Westpac economists expected the deficit to zigzag around present levels for the rest of the year.
The summer drought was expected to hit export volumes in the June quarter, which would see the deficit worsen again.
But Westpac economist Nathan Penny expected that the September quarter would see another improvement as the spike in dairy prices flowed through.
But next year and beyond the deficit would get worse as the Canterbury rebuild created demand for imports, and profits of foreign- owned companies in New Zealand improved.
From 2014 the goods balance would "head south" because of the demand for imports, and households that were borrowing and spending more would add to the import bill.
And growth was lopsided, with the export sector suffering the impact of the summer drought and and a still over-valued exchange rate, while the domestic leg was getting stronger.
UBS economist Robin Clements said there would be a respite for the deficit this year, but it would strike above 5 per cent of GDP again early next year and head towards 6 per cent of GDP by early 2015 as investment ramped up.
The outlook for the current account shortfall posed a "medium-term downside risk for the New Zealand dollar" UBS said. The currency was trading at US80.1c late yesterday, up from US79.8c earlier in the day.
New Zealand has run deficits for decades and the IMF said earlier this year that persistent current account deficits are resulting in net external liabilities which are "high by international standards".
Statistics NZ said the balance on goods and services grew $404m from the December quarter, reflecting higher exports, mainly dairy products, and higher spending by foreign tourists in New Zealand.
WHAT IS A CAD?
A current account deficit means the rest of the world earned more from New Zealand than New Zealand earned from overseas.
March year current account deficit: $10.1 billion or 4.8 per cent of GDP (5% in December year)
March quarter deficit: $2.2 billion ($2.5 billion in December quarter).
Seasonally adjusted balance on goods: surplus of $615 million, up $220m as dairy export volumes rose.
Imports were flat because of a strong New Zealand dollar.
Services balance: smaller deficit of $124 million as tourists spent more in New Zealand.
Balance on income and transfers: flat deficit of $2.5 billion
Net international liabilities: $146.7 billion at the end of March, equal to 69.3 per cent of GDP reflecting rising overseas share prices lifting the value of New Zealand's overseas assets.
Source: Statistics NZ