KEY POINTS:
Worse-than-expected balance of payments figures highlight the economy's vulnerability, especially during a credit crunch, economists say.
The current account deficit climbed to $15 billion, or an estimated 8.3 per cent of gross domestic product, in the year ended June, up from $14.2 billion and 8 per cent in March.
New Zealand's net debt to the rest of the world increased to $159 billion or 88 per cent of GDP from $154 billion in March.
The cost of servicing that debt - $13.9 billion in the June year - explains most of the current account deficit. The deficit is the gap between what the country earns from the rest of the world through trade and investment and what the rest of the world earns from us.
It is also a measure of the imbalance between domestic saving and investment, which has to be funded by imported or repatriated capital.
Unusually, in the latest quarter the net capital inflow of $4.5 billion was entirely a matter of withdrawing New Zealand investment abroad; foreign investment into the country shrank by $600 million.
"Clearly there are limits to how long we can use that source of funding," Westpac economist Michael Gordon said. "But it's understandable in the current environment."
Goodman Sachs JBWere economist Shamubeel Eaqub said the heightened instability in global financial markets was a concern as it could impact on capital flows, which New Zealand was very reliant on because of its very low domestic savings.
"As the price of risk is reassessed globally, for highly indebted economies like New Zealand which have used their borrowing to invest in a non-productive asset class - housing - the end game is highly uncertain, but clearly the risks are heavily skewed to the downside."
The trade balance deteriorated sharply in the June quarter, as drought hit dairy exports while imports were swollen by an oil rig and associated equipment.
Eaqub said the underlying picture was one in which favourable terms of trade (relative prices of the kinds of things the country exports compared to what it imports) had "papered over" a large trade deficit in volume terms.
But the terms of trade were expected to deteriorate from here. Dairy prices were at their lowest level since late 2006, he said, and meat had retraced some of its recent gains.
Bank of New Zealand economist Stephen Toplis, reflecting on the implications of current market turmoil, said much of the euphoria of the last 10 years has been debt-fed.
"It will be a long time, if ever, before we return to that sort of environment. This means that over the next five years or so household spending and business investment will be lower than we have become accustomed to," Toplis said.
"That means lower GDP growth than would otherwise have been the case but, more insidiously, reduced investment also means a lower potential growth path. In other words inflation will appear more quickly than in the past."
At the same time there were some big positive features, he said.
The high official cash rate and the strength of the Crown accounts gave plenty of scope to ease and the banking system was in good shape.
Over the medium term export commodity prices could be expected to improve. "And we've got water."
But the process of getting household balance sheets in order would take time.
The adjustment might be particularly challenging for "Generation Y" who had grown up to expect job mobility, employee strength and debt-fuelled consumption, Toplis said.
"For these folk the world is now a very different place."