Deficit improves for wrong reasons

Craig Ebert. Photo / Supplied

The current account deficit improved in the March quarter but mainly for the wrong reason - underwriting losses incurred by foreign-owned insurers related to the Canterbury earthquakes.

The gap between what the country earned through trade and investment from the rest of the world and what the rest of the world earned from us was $1.8 billion in the quarter, seasonally adjusted, compared with a deficit of $2.9 billion for the December 2010 quarter.

Some of the improvement ($232 million) was due to a bigger surplus in the goods balance, driven by higher export prices. Export volumes overall were flat, Statistics New Zealand said, with higher shipments of dairy products offset by a fall in meat.

Imports were higher, too, driven by a jump of 21 per cent in the price of crude oil.

The balance on services (like tourism) was $185 million in deficit, but $44 million smaller than in the December quarter, reflecting higher spending by overseas visitors.

"Services exports held up extremely well in the March quarter," said Bank of New Zealand economist Craig Ebert.

"This is not to deny the severe disruptions caused by the Christchurch quake, more that there were enough offsets for the inbound tourism markets around the rest of the country."

But the big movement in the quarter was in the investment-income balance. It was in the red by $2.4 billion, an $862 million improvement on the December quarter.

That reflected an $869 million drop in foreign investors' earnings on their New Zealand subsidiaries, mainly caused by losses reported by the insurance industry, SNZ said.

However, claims on foreign reinsurers relating to the earthquakes are not reported in the current account.

They amounted to $7.6 billion in the March quarter on top of $3.6 billion in the September 2010 quarter.

Until the claims are settled, which in some cases is expected to take years, they are treated as an asset in the country's external balance sheet.

The effect is that the net international liabilities position - $148 billion at March 31 - is flattered by $11 billion.

It is still equivalent to an estimated 76 per cent of gross domestic product. That is high by international standards but less conspicuous than the 90 per cent of GDP recorded two years ago. For the year to March, the current account deficit was $8.3 billion, up from $8 billion for calendar 2010.

In the near term, economists expect strong export commodity prices to keep the goods balance in surplus and contribute to a smaller current account deficit.

But ASB economist Jane Turner said that assuming the economy returned to its path of recovery and the financial impact of the earthquakes was contained, the profitability of foreign-owned companies would improve over the coming year, widening the current account deficit again.