KEY POINTS:
A fall in the amount New Zealand earned on its investment abroad was the key factor behind a worse than expected current account performance in the March quarter.
Data published by Statistics New Zealand (SNZ) today show the current account deficit at $2.16 billion for the March quarter, compared to the median forecast of economists in a Reuters poll for a deficit of $1.66b.
The surprising bad news came despite the first actual dollar goods surplus for a March quarter, at $295 million, since 2003.
The March year deficit was $13.79b against the median forecast of $13.25b, and $13.84b in the December year. The annual deficit equated to 7.8 per cent of Gross Domestic Product, down from 7.9 per cent in the December year but worse than the 7.5 per cent median forecast.
The seasonally adjusted current account deficit widened by $410m in the March quarter to $3.53b.
ANZ Bank said the investment income deficit continued to stand out and act as a huge drag on the current account.
The $315m deterioration in the investment income deficit was driven by a $346m fall in the income this country earned on its investments offshore.
SNZ said that was mostly due to a fall in income earned by overseas subsidiaries of New Zealand companies.
That was an indication those companies were facing tough operating environments abroad, ANZ said.
Surprisingly, the income foreign direct investors earned from their New Zealand subsidiaries rose over the quarter from $1.9b in December to $2.07b in March.
That was despite a slowing domestic economy and intense cost pressures on margins, ANZ said.
That profit was more than fully paid out in dividends to the foreign direct investors to the tune of $2.23b, implying a withdrawal of investment from New Zealand companies by foreign direct investors of $159m.
Westpac economists Brendan O'Donovan and Michael Gordon said that because of New Zealanders' poor savings record, foreigners owned considerably more of this country's assets than New Zealanders owned of theirs.
As a result the balance of income earned was overwhelmingly negative, they said.
They expected a gradual improvement in the investment income deficit in the next couple of years.
Investment income earned offshore was set to become a significant contributor to the current account balance in coming years, as the likes of Kiwisaver schemes and the New Zealand Super Fund invested more in overseas assets, the Westpac economists said.
The overall trend would depend on New Zealanders' savings behaviour, so reduced growth in borrowing should also improve the investment deficit in the next couple of years.
The seasonally adjusted goods balance in the March quarter was a deficit of $158m, with exports up $245m and imports up $384m, both to record high values.
Key factors included a rise in dairy product prices and in the amount of meat exported, while the rise in imports was mainly due to higher prices for petroleum and petroleum products. The volume of crude oil imported - often affected by large, irregular imports - also rose significantly.
ASB economists Nick Tuffley and Jane Turner said the benefits from high dairy prices would be increasingly offset by higher bills for both oil imports and debt servicing.
But they still saw scope for the current account deficit to fall below 7 per cent of GDP later this year.
- NZPA
