Q: We often hear economists worrying about the current account deficit. What exactly is it and how bad is it? – David R
A: New Zealand’s current account deficit is definitely a bad thing. Whether it is really bad or just pretty bad might depend on who you talk to. For some commentators it is the biggest economic issue facing the country, others are more relaxed about the way it goes through cycles.
We got fresh data from Stats NZ on December 18 showing the deficit has continued to improve – thanks largely to the continued return of overseas tourists.
But it is still a huge number – and shortfall – at almost $30 billion.
Essentially, the current account is a measure of the money flowing into and out of the country. It can get confusing because there’s a bit of jargon around the current account’s components ... and its place as a component of New Zealand’s total balance of payments.
The easiest bit to understand is the inflow of foreign exchange we earn from exports and the outflow we spend on imports. This is a component of the current account that is also described as the trade balance.
But the current account also includes things like business profits and investments flowing into and out of the country. So, for example, the fact that the banks in New Zealand are largely foreign owned means multibillion-dollar profits represent a big drain on our current account.
It’s one of the reasons New Zealand is always on the back foot when it comes to trying to run current account surpluses (ie take in more money than we spend).
The grim reality is we are usually in deficit – at least since we opened the economy in the 1980s. We recorded a big surplus (the largest since 1971) in June 2020 – but that was just a weird symptom of closing the borders and locking everyone down at home. We didn’t buy any petrol and overall imports dived.
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The other side of the ledger ...
The current account is itself a subset of a broader measure of a nation’s financial position with the rest of the world. That’s called the balance of payments and it’s a full set of data that Stats NZ releases.
The balance of payments includes the current account and the capital account. The capital account reflects the net change in a country’s foreign assets and liabilities (or debt). If we run a current account deficit (which we do), that shortfall has to be offset by borrowing, which is added to the capital account.
So, basically, we are a nation that lives on its overdraft and when it blows out that can be worrying. Especially to those with a conservative attitude to debt.
How bad is it really?
Current account deficits are almost always big, horrible multibillion-dollar figures. But to get a sense of how bad they really are, it helps to look at them as a percentage of GDP.
To stay with the personal finance analogy, that’s like weighing the size of your overdraft against your annual salary – ie your ability to service that overdraft.
International lenders (and the rating agencies that decide how risky we are to lend to) seem to stay reasonably relaxed about the big numbers because they back the fundamentals of New Zealand’s economy. We sell food to the world and beautiful vistas to tourists. We also have a transparent and stable financial system and a (relatively) sane political landscape. So we retain a strong credit rating.
That said, things started to look precarious early last year when the current account deficit reached 8.8% of GDP. Anything above 10% is considered a bad look for a country our size and might have us cop a credit downgrade – pushing up borrowing costs (which can become a downward spiral).
The current account deficit has improved slowly as tourism earnings have rebounded. For the year to September 30, 2023, it was back to 7.4% of GDP.
Now it is down to just 6.4% as of the year ended September 30, 2024.
That’s still an annual overdraft of $27b (if you really want to worry). But it’s the direction of travel that matters right now. Economists will be hoping the improvement continues this year.
Liam Dann is business editor-at-large for the New Zealand Herald. He is a senior writer and columnist and also presents and produces videos and podcasts. He joined the Herald in 2003. To sign up to his weekly newsletter, click on your user profile at nzherald.co.nz and select ‘My newsletters’. For a step-by-step guide, click here. If you have a burning question about the quirks or intricacies of economics send it to liam.dann@nzherald.co.nz or leave a message in the comments section.
