New Zealand's seasonally adjusted current account deficit swelled to NZ$1.8 billion in the June 2010 quarter, as foreign owned New Zealand companies made bigger profits, foreign investors paid less tax and overseas visitors spent less.
(Updates add further detail, unadjusted deficit, economist's comments on the Canterbury earthquake being expected to narrow the deficit & chart).
Statistics New Zealand said today the June quarter deficit was up NZ$560 million from the March 2010 quarter and compares to a deficit of NZ$570 million in the June quarter last year.
The current account deficit for the year to June was NZ$5.6 billion, 3% of Gross Domestic Product (GDP), down from NZ$10.5 billion, or 5.7% of GDP, a year ago. Imports of goods, such as non-food manufactures, fell NZ$5.5 billion over this period.
Statistics New Zealand also said as of June 30, New Zealand's net international liabilities were NZ$163.7 billion, or 86.5% of GDP. That's up NZ$2.7 billion from March 31. The increase stemmed from net foreign investment inflows of NZ$1.3 billion, combined with falling overseas sharemarkets as a drop in offshore sharemarkets where New Zealand funds are invested decreases the value of our overseas assets.
John Morris, Statistics New Zealand's balance of payments manager, said the June quarter rise in the deficit from March was mainly due to an increase in the income deficit and lower taxes received from foreign investors.
"Foreign-owned New Zealand companies earned higher profits this quarter, driving the rise in the income deficit," Morris said.
Foreign investors also earned more from their other shareholdings and lending in New Zealand. And taxes paid by foreign investors were lower this quarter after a policy change on non-resident withholding tax, introduced by the Inland Revenue Department in February.
"Another factor increasing New Zealand's deficit with the rest of the world this quarter was a fall in spending by visitors to New Zealand," Morris said.
"Visitor numbers were down, along with spending per person."
However, rising prices for New Zealand goods overseas lifted goods exports, driving the goods surplus to NZ$1.2 billion, the biggest surplus since the Statistics New Zealand series began in 1987. Morris said the quarterly goods figures reflected the continuing impact of rising dairy export prices.
The unadjusted June quarter current account deficit was NZ$880 million, higher than the NZ$500 million to NZ$600 million expected by economists.
Earthquake could temporarily narrow deficit
ASB economist Jane Turner said smaller recent deficits were largely cyclical as weakened profitability caused a sharp decline in the income deficit and as lower import demand helped deliver trade surpluses.
"As the economic recovery continues to gain traction, we expect that the current account deficit will continue to widen mostly driven by an increase in the income deficit," Turner said.
"However, these underlying dynamics are likely to be interrupted over the next few quarters as a result of the Canterbury earthquake. We expect the overall impact will be to narrow the current account deficit temporarily, due to the one-off transfer coming from the insurance payout," said Turner.
She notes that the Earthquake Commission has indicated some its NZ$1.5 billion payout will come through selling shares, worth about 30% of its NZ$5.6 billion of assets, cutting New Zealand's holdings of foreign assets.
"In addition, as the Government is set to pick up the bulk of the public sector damage there remains the possibility it may have to increase its debt issuance, some if which may be purchased by foreigners."
Westpac economists, meanwhile, predicted that the annual deficit had probably bottomed out. The challenge from here, they said, was to identify how far it will widen as the economy recovers.
"We're becoming more confident that there has been a step-change in New Zealand's trade performance compared to the last cycle," the Westpac economists' said.
"Strong demand from developing Asia (particularly China) will continue to support export prices and volumes, and we expect to see more frequent trade surpluses in coming years. We expect imports will be more contained this decade than they were in the 2000s, because consumers are expected to be more subdued."
"While the investment income deficit will remain large, this should still be enough to see the overall deficit settle into a range of around 5% of GDP, compared to the 8.7% peak last decade."