Economists see current account deficit widening further; BNZ sees it as part of the 'bigger slippery slope'

Economists see current account deficit widening further; BNZ sees it as part of the 'bigger slippery slope'

Economists say the current account deficit, which has now hit 5% of GDP, is set to blow out further in the future.

New Zealand's 2012 calendar year current account deficit was NZ$10.5 billion. A current account deficit means the rest of the world earned more from New Zealand than New Zealand earned from overseas.

Westpac economist Nathan Penny says the latest increase in the deficit is a "worrying symptom of New Zealand's two-speed economy and re-emerging imbalances".

BNZ economist Doug Steel also sees "imbalances" in the economy and says they are set to worsen.

"We see today's outcome as part of the slippery slope that we think the external accounts are on," he says.

"We see the current account deficit nudging 6% of GDP by the end of 2013 and 7% by the end of 2014.

"That might, and should, garner a bit more attention from the market and rating agencies alike, even if part of it is temporary on account of the anticipated impacts of the drought and Canterbury investment surge."

Westpac's Penny sees the deficit widening to over 6% of GDP over the next couple of years "as the drought weighs on export volumes, imports rise as the Christchurch rebuild continues to ramp up and foreign-owned firms become more profitable".

Penny says the economy is clearly improving, but the driver is domestic demand.

"The Canterbury rebuild is driving activity higher as are rising house prices, while household spending and business confidence are on the up.

"Meanwhile, the export sector is struggling with the high exchange rate and now drought. All this adds up to an economy taking two steps forward and one step sideways.

"Many businesses will enjoy the improvement in the domestic economy. And markets will continue to look favourably upon New Zealand compared to our international peers. But we worry-pants economists will fret about worsening economic imbalances such as the current account deficit, the household debt to income ratio (which is rising), overvalued house prices, and the overvalued exchange rate.

"Eventually, New Zealand’s ‘borrow and spend’ ways may get it in trouble," Penny says.

BNZ's Steel says his bank has "long discussed" the prospect of deteriorating external accounts as a strong building investment impulse is unleashed as the Christchurch rebuild amplifies an already positive outlook for domestic construction.

"National savings have never looked liked keeping pace, and still don't.

"Not with rising house prices and very low interest rates encouraging consumption over saving. It might keep growth chugging along in the near term and probably even with relatively low headline inflation for a while. But a wider current account deficit does ask questions about the sustainability of such growth rates in the medium term.

"The current drought conditions simply add to the negative outlook in our view. For a start, it will directly widen the merchandise trade deficit. And while it is quite conceivable that the reduction in national income pulls down domestic savings a big chunk of domestic investment will likely barrel on regardless of current income."

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National's plans to re-balance the economy away from consumption to saving and exporting are lookin pretty awesome right about now

It is called policy failure but if we ignore it - it may go away till at least after the next election.

But our two speed economy is being encouraged by banks willingness to lend into a housing bubble in Auckland, at crazy LVR ratios while our exports crumble.
We need the RB to step up to the plate and do something, the days of sitting and twiddling need to stop, we don't need more debt, when we dont have the productive capacity to pay it back.
 On top of this the goverment is borrowing to fund  crazy spending plans and support overpaid state workers
 The banks will take us off a cliff if we let them, and the governmet will be right behind them all the way.

"We see today's outcome as part of the slippery slope that we think the external accounts are on," he says.
 
"We see the current account deficit nudging 6% of GDP by the end of 2013 and 7% by the end of 2014.
 
"That might, and should, garner a bit more attention from the market and rating agencies alike, even if part of it is temporary on account of the anticipated impacts of the drought and Canterbury investment surge."
 
Cripes!!! - the foreign lenders (Australian banks included) might cut us loose just to see what happens ?
 
Similar to the Eurogroup experiment in Cyprus,
 
But of course we would not get to see our parlliament debate the OBR topic - all would unfold from behind closed doors without enabling legislation and let's not get hysterical, covered bond issuance preceeded any legislation and a select committee discussion.

Astoundingly important.  Not much concern in Wellington.  Even less action.
It's this absence of action that makes me want this government out.  Their only safety is their inane opposition. 

things will just get worse and worse until things crash, or we get a new government, or both.

is it just me or is there an incredible lack of criticism of policy in the NZ media?
Pick up "The Australian" paper here and everyday there is analysys and criticism of some depth and substance.
The NZ govt seem to be getting a very easy ride.

Two steps forward and one step sideways. That is actually a pretty good outcome all matters considered.
Our taxation system is creating many distortions. All NZ'ers need to get into business and start seriously performing. The Bureaucratic organisations need to be on the main disbanded.
 
People can whinge all they like about the Government - but how many people are in business in NZ. People still have the dream of a house and picket fence without the business acumen behind their decisions.
Should a house be something you purchase to live in or should it be a business?
Unitl people get their heads around this concept then we are going to have all the cries from the above posters.

"Telecom boss Simon Moutter said last month that job cuts could run "well into their hundreds" and would not rule out more than 1000 positions going as the company looked to reduce its costs."herald
Telecom bosses and directors in line for fat salary increases and bonuses.....how's that for an imbalance!