NZ's current account deeper in the red

Imports of goods increased by $102 million more than exports in the December quarter. Photo / Brett Phibbs

New Zealand's external accounts sank deeper into the red during the last three months of 2014.

The current account deficit for the quarter was $2.6 billion, a six-year high, driven by a worsening trade balance and stronger profitability among foreign-owned companies in New Zealand.

It pushed the annual deficit to $7.8 billion, equivalent to 3.3 per cent of gross domestic product, up from $6.1 billion and 2.6 per cent respectively for the year ended September 2014.

Before the global financial crisis the annual deficit tended to run between 7 and 8 per cent of GDP and since the GFC it has been in the 2 to 4 per cent range.

But economists forecast it to hit 5 per cent by the end of the year.

Bank of New Zealand economist Doug Steel said a bigger annual deficit ahead was all but assured over coming quarters. A good chunk of that was essentially the external accounts fully reflecting the slump in dairy prices to date and ongoing robust domestic demand.

The fall in dairy prices at auction yesterday only reinforced the dairy headwind to the external accounts currently in play, he said, while the dry conditions affecting New Zealand would lead to volatility in meat and dairy export volumes.

But factors pushing the other way included lower international oil prices and strongly growing services exports, Steel said.

In the December quarter exports and imports of goods both increased but the latter by $102 million more than the former, widening the deficit in the goods balance to $458 million.

That was offset by a $231 million improvement in the balance on services to a surplus of $655 million, underpinned by an increase in overseas visitors and a higher spend per capita. But as usual the goods and services balances were swamped by a negative investment income balance - $2.8 billion in the quarter, making a deficit of $10.8 billion for the whole of 2014. That reflects the fact that foreign claims on the New Zealand economy (debt and equity) exceed New Zealand investment overseas by $153.9 billion.

Foreign direct investment in New Zealand last year earned $8.2 billion, up 10.5 per cent on 2013, of which 37c in the dollar was reinvested, down from 44c in 2013.

"Higher profits are a positive indicator of domestic activity, and are less of a concern in terms of the nation's ability to fund the current account deficit," said Westpac economist Michael Gordon.

New Zealand's net international liabilities of $153.9 billion are equivalent to 64.7 per cent of GDP and are still flattered by $4.4 billion of earthquake-related reinsurance claims which have yet to be paid and which count as an overseas asset until they are.

ASB economist Jane Turner said the pace of reinsurance settlement had slowed to around $500 million a quarter over 2014, having run at over $1 billion a quarter in 2013. ANZ economist Philip Borkin said the net liability position of 64.7 per cent of GDP was low by recent New Zealand standards and compared with 85 per cent of GDP in 2009.

"The New Zealand economy ... is in a structurally sounder position than it was prior to the global financial crisis," Borkin said.