Current account deficit much worse than forecast

The kiwi fell a third of a cent against the dollar within minutes of the news.

Economists had forecast a horror current account deficit for the March quarter but Statistics New Zealand today reported it was even worse than those forecasts had predicted.

The March quarter seasonally-adjusted deficit for New Zealand's financial dealings with the outside world came to $4.1 billion. The actual deficit came in at $2.67 billion compared with the $2.2 billion median forecast of 11 economists polled by Reuters.

It was the worst quarterly deficit in the 52 year history of the series, surpassing the $3.85 billion record set in September 2005.

The quarterly deficit pushed the annual shortfall to a massive $14.5 billion - another record in nominal terms.

The annual deficit equated to 9.3 per cent of Gross Domestic Product - the worst result since the 13 per cent deficit recorded during the first oil shock of 1975.

The news immediately sent the kiwi dollar, spiralling lower against the United States dollar.

The kiwi had already plunged 9 per cent this year against the US dollar.

Alarm bells normally ring for international investors when a country's deficit hits 5 per cent of GDP.

The current account, also known as the balance of payments, has suffered as a result of New Zealand's hugely higher oil bill, due to the rising cost of crude oil.

SNZ said the widening of the deficit was mainly due to an increase of imports of goods and services combined with an increase in income earned by foreigners in New Zealand.

In the year to March, the deficit was funded by a net sale of assets abroad of $4.5 billion, while foreigners bought up $9.2 billion of assets in New Zealand.

The deficit was financed by $7.9 billion of foreign investment into New Zealand during the quarter, exceeding the $5.8 billion of New Zealand's investment abroad.

SNZ said the banking sector was the most significant contributor to these transactions.

New Zealand's net foreign debt actually fell by $2 billion from the December quarter to $132.9 billion.

Imports of goods exceeded exports by $1.058 billion in the quarter.

The value of imports rose $396 million from the December quarter with both import prices and volumes contributing.

The price of petrol imports rose for the eighth time in nine quarters. Imports of services rose due to higher spending of New Zealanders travelling abroad and higher freight payments.

The wider investment income deficit was due to higher income payments to foreigners in New Zealand combined with lower earnings from investments abroad.

The value of exports of goods rose $190m to $8.15 billion from the December quarter. Export prices rose 3.2 per cent in the March quarter however, volumes fell. On a trade-weighted index basis, the New Zealand dollar fell 4.4 per cent during the quarter.

BNZ economist Craig Ebert said "this is what you get when you have an overheated economy".

"It's not a pretty number and it will hang over the currency for quite a while. Even if the dynamics are kicking in to get it back into a safer zone it will take a long time to play out and will be an albatross around the neck of the currency."

Mr Ebert said the headline numbers were clearly bad but it was a matter of degree - the difference between 9.3 and 9.0 per cent of GDP was not really that much.

"What is important is the level that it is at.

"This is what you get when you have an overheated economy. It may be coming off the boil a little bit but this is a hangover from an overextended growth phase."

- NZPA / REUTERS

* An earlier version of this story incorrectly stated that the deficit was "almost twice as dire" as Statistics NZ had predicted.

It wrongly said economists polled by Reuters had forecast a $2.2 billion deficit. The correct figure is $2.67 billion.