December deficit rises to worst on record

By JIM EAGLES business editor

The shortfall between spending on imports and earnings from exports reached record levels as the country engaged in its pre-Christmas spend-up.

Statistics New Zealand yesterday reported the worst deficit for the month of December since records began in 1960. The provisional $506 million shortfall for the month was well above the $297 million expected by economists.

It brought the trade deficit for the December quarter to the equivalent of 23.5 per cent of exports, the biggest gap in 15 years, apart from a distortion arising from the purchase of the frigate Te Mana in 1999.

And it boosted the deficit for the year to $3.4 billion - nearly three times the shortfall in 2002 - a figure exceeded only by the frigate factor in 1999.

The value of imports in the three-month period was 1.8 per cent lower than a year before but Deutsche Bank calculated that, allowing for the rise in the value of the kiwi dollar, volumes of imports were 7-8 per cent higher. By contrast, the value of exports was 4.7 per cent down on a year ago, a drop caused by a combination of the currency movement and a 1 per cent fall in export volumes.

Craig Ebert, senior markets economist at the BNZ, said the higher-than-expected deficit was "certainly unpleasant news for the current account".

The big surprise, he said, was not the fall in exports but the size of the surge in imports. "This all reinforces the tack the Reserve Bank took ... in lifting the cash rate to avoid the inflation dangers of an overheated economy."

The good news in the figures was a continuing increase in imports of plant and machinery.

Ebert said the value of capital equipment imported during the month was 13.7 per cent higher than a year ago and when currency movements were taken into account the increase was much greater.

That was the result of "productive resources becoming extremely stretched, implying a pressing need for firms to add to capacity".