New Zealand’s annual current account deficit last year was $33.8 billion, or 8.9% of gross domestic product — the worst ratio since measurement began in 1988.
The deficit was $12.7 billion wider than in 2021, making the ratio to GDP worse than the previous record of 7.8% during the global financial crisis in 2008.
Statistics New Zealand said a current account deficit shows we are spending more than we are earning overseas, and the ratio to GDP shows its significance to the overall economy.
Miles Workman, a senior economist at ANZ Bank, said New Zealand has persistently run current account deficits of between 3% and 4% of GDP in more normal times.
The services balance turned negative when borders were closed during the pandemic, decimating international tourism and education exports, widening the deficit.
“The outlook is for the current account to narrow as domestic demand softens and international tourism and education exports continue to recover,” he said in a note.
The current account gives an indication of whether or not an economy is ‘living within its means’ and the wide deficit suggests NZ has not been.
Reopened borders and monetary tightening, which will weigh on domestic demand and therefore imports, should mean the deficit should narrow over time and dissuade credit rating agencies from issuing downgrades.
“All up, New Zealand’s external balance suggests inflation isn’t the only reason for monetary tightening to guide the economy towards a more sustainable path.”
“It should also act as a constraint against excess fiscal expansion, showing that while Government debt is relatively low from an international perspective, NZ-wide debt is not,” Workman said.
Drivers driving deficit
The cavernous 2022 account deficit was mainly due to a $10 billion widening of goods and services deficit and $2.7 billion widening of the income deficit.
Paul Pascoe, Stats NZ’s institutional sectors senior manager, said the increase in goods imports was driven by machinery, petrol, and motor vehicles.
Services imports were largely transportation services, business services, and travel services.
“Since New Zealand’s borders opened more New Zealanders have been travelling overseas. The spending on both air transport and travel contributed to the rise in services imports for the year to December 2022”.
Exports of goods and services increased $13.1 billion, with dairy and meat products contributing significantly. The increase in services exports was driven by overseas visitors spending in New Zealand.
The primary income deficit, or the balance of what New Zealanders earn from overseas investments and what overseas investors earn from New Zealand, widened to $11.9 billion.
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