KEY POINTS:
The current account deficit is expected to have narrowed somewhat in the March quarter as the country endowed the most favourable terms of trade since 1974.
But the improvement economists expect is only relative.
They are looking for Statistics New Zealand to report on Thursday the deficit on the current account of the balance of payments reduced to a still wide 7.5 per cent for the year ended March, from 7.9 per cent in the year ended December.
But it would still be the smallest deficit since 2005. It peaked at 9.7 per cent in June 2006.
"The main reason the deficit will improve is the jump in the terms of trade - our export prices versus our import prices - which rose 4.1 per cent in the March quarter," Westpac chief economist Brendan O'Donovan said.
"The still-high exchange rate and the drought dampened export volumes, but import volumes also fell a little, providing some offset."
Overall, Westpac expects the goods balance to improve from a quarterly surplus of $84 million in December, seasonally adjusted, to around $300 million in March. But the biggest component of the current account deficit is net investment income, which is very hard toforecast.
Westpac thinks it worsened by around $180 million in the quarter as the profits of overseas-owned companies in New Zealand generally fell, offset by profits to the largely foreign owners of the Tui oil field.
Looking forward O'Donovan expects the deficit to "hold its own" for another quarter, thanks to high prices for dairy products while slowing consumption and investment cool demand for imports.
"But with global oil prices up some 40 per cent in the June quarter, the terms of trade and the current account are likely to head south again later this year."
The larger the deficit the more dependent New Zealand becomes on foreign funding, which is now expensive and difficult to obtain, he said.
