New Zealand’s current account deficit shrunk to 8.5% of GDP in the first quarter of 2023

New Zealand’s annual current account deficit was $33 billion, or 8.5% of gross domestic product, in the year ended March — down from $34.4 billion in the 12-months to December.

This means the country is still spending more than it is earning overseas, but less than it was last year when the trade deficit hit a decade-long record at 9%.

Some economists expected the trade balance to worsen in the first quarter of 2023, but it improved slightly as service exports, such as tourism, recovered. 

Stats NZ said service exports increased 56% to $22 billion in the year ended March 2023, while service exports increased 40.3% to $29.4 billion. 

Paul Pascoe, a senior manager at Stats NZ, said both import and exports of travel and transportation services increased during the year as more people made trips in and out of the country. 

The historically wide trade deficit has been largely due to low commodity prices and higher import needs, including of fuel after the closure of Marsden Point refinery. 

Also, the covid-19 pandemic greatly depressed two of the country’s service exports — tourism and education — neither of which have yet bounced back fully. 

In the year ended March, goods imports increased 18.4% to $86.6 billion, driven by petrol, machinery, and transport equipment. 

Goods exports increased just 10.7% to $73.0 billion driven by  dairy products, such as milk powder, butter, and cheese.

New Zealand’s net liability position—or international debt—shrunk $5.5 billion, or 2.9%, to a net $189.1 billion. 

A significant inflow of insurance money boosted NZ’s capital account which recorded $2.3 billion coming into the country. 

“The March 2023 quarter inflow of $2.3 billion is mainly made up of claims by New Zealand insurers on overseas reinsurers, following the larger than usual claims that have arisen from the Auckland flooding and Cyclone Gabrielle,” Pascoe said.

A reinsurer is an insurance company that insures the risks of other insurance companies

Slightly less wonky 

Miles Workman, a senior economist at ANZ Bank, said the current account data showed a “slightly less wonky” economy. 

“All up, New Zealand remains severely out of balance, but with tourism recovering, we now appear past the worst of it. That said, it could be a long road to something more sustainable”.

The country may need to maintain a weaker NZ dollar and higher interest rates to bring the ledger back into balance. 

International tourism and education are both progressing well and the FIFA Woman’s World Cup, which kicks off in July, could help to keep export momentum through the winter lull. 

However, exports need to do more than just return to pre-covid levels, they need to overtake imports which have grown well beyond pre-pandemic levels. 

Michael Gordon, a senior economist at Westpac, said the smaller deficit was a surprise as his team and financial markets were expecting an unchanged result.

“The other, though much smaller, surprise for us was that profits of overseas firms were down sharply compared to previous quarters,” he said. 

“We’re seeing something similar in the corporate tax data, which is now falling substantially short of the Treasury’s forecasts as businesses struggle with rising costs and a cooling economy”.

The blowout in the current account deficit was due to both a loss of export earnings from overseas tourists, and a surge in imported goods prices and shipping costs.

“There are limited avenues for boosting our export earnings from here, so bringing the current account deficit back to levels that are more sustainable over the long term will require a reduction in our spending on imports,” he said.