Balance of payments stays put

By BRIAN FALLOW economics editor

The gap between what New Zealand earns from the rest of the world and what it spends grew no wider in the March quarter.

Statistics New Zealand reported a surplus in the current account of the balance of payments of $174 million compared with a deficit of $1.76 billion in the December quarter, but when the figures are adjusted for seasonal effects both quarters were in the red by $1.2 billion.

For the year ended March the deficit was $5.7 billion, up only slightly from annual deficits of $5.6 billion three months and six months earlier.

The $5.7 billion deficit equates to 4.2 per cent of gross domestic product, which keeps that ratio in line with its level over the past year.

Although the prevailing view is that it will get worse before it gets better, with forecasters suggesting figures around 5 per cent to 5.5 per cent for the trough, that would be better than the last two cycles when the deficit reached 6.6 per cent and 6.9 per cent of GDP - very ugly numbers by international standards.

In the March quarter the main factors acting to reduce the deficit were higher export volumes, higher world prices for export commodities and a fall in the profits of foreign-owned companies in New Zealand.

Offsetting that were rising imports, a higher New Zealand dollar and a drop in spending by tourists. Although visitor numbers were up, more of them were Australian and overall they did not stay as long or spend as much.

Over the year, the balance on goods was a deficit of $600 million but the balance on services (mainly tourism and travel) was a surplus of $1.2 billion.

Bank of New Zealand economist Stephen Toplis said: "Exports are rising well but imports are completely swamping them, which is a reflection of the very strong domestic economy both in terms of consumer spending and the pace of [business] investment."

The investment income balance was a deficit of $6.5 billion, reflecting the fact that New Zealand is a net debtor to the tune of $107 billion.

Transfers were a net inflow of just under $200 million.

The $107 billion net debtor position, the cumulative effect of decades of running current account deficits, is a $1.8 billion deterioration from the end of December.

The value of New Zealand investment abroad rose $4.2 billion, reflecting a net flow of $5.8 billion in new investment, including $1.8 billion into overseas shares, offset by a drop in the value of existing investments, especially derivatives positions.

At the same time the value of foreign investment in New Zealand rose $6 billion. Three quarters of that was new money, especially to fund bank lending, and the rest was a rise in the value of existing investments, especially shares.

Economists expect the cost of servicing that net debt to climb as world interest rates rise, pushing the overall balance of payments lower even as a cooling domestic economy improves the good trade position.