Investment deficit swamps trade surplus

By BRIAN FALLOW economics editor

The current account deficit widened in the June quarter, although much of the deterioration reflected the improved profitability of foreign-owned companies in New Zealand.

The deficit, which represents the difference between what New Zealand earns from the rest of the world through trade, tourism and investment and what the rest of the world earns from us, had been improving through 2000 and 2001. In the year ended March, it was $2.6 billion, equivalent to 2.2 per cent of gross domestic product, the best that ratio has been for 13 years.

But yesterday's figures suggest that was as good as it got.

The June-quarter deficit of $800 million pushed the annual shortfall out to $3 billion, an estimated 2.5 per cent of GDP.

The balance on goods and services was just under $1 billion in the black, a modest improvement on the March quarter when adjusted for seasonal effects. This component of the current account has been in surplus for more than two years.

In the latest quarter, falls in export prices were more than offset by higher volumes.

Tourist numbers and spending were higher than they had been in the same quarter last year.

But the improvement on the trade front was swamped by the investment income deficit, which widened almost $500 million.

That reflected both a drop in earnings from New Zealand investment abroad and improved earnings accruing to foreign investors in New Zealand.

For the past two quarters a majority of the profits earned on foreign-direct investment in New Zealand has been retained in the companies concerned rather than taken out in dividends.

In the year ended June, of the $4 billion in profits on FDI in New Zealand (all of which counts as an outflow in the balance of payments), 52 per cent was distributed in dividends.

That compares with a 68 per cent payout ratio in the year to June 2001 and a whopping 98 per cent on average over the two years before that.

Economists expect the current account balance to continue to worsen from here.

WestpacTrust economist Nick Tuffley said the trade balance, already down on a year ago, would come under pressure from slow growth in the global economy combined with solid - for now - domestic growth.

Deutsche Bank's Darren Gibbs pointed to the worse-than-expected trade deficit in August, also reported yesterday, as evidence of a deteriorating trade outlook.

The August trade deficit of $542 million reflected higher-than-expected imports of consumer goods, cars and oil.

Oil prices have risen by 26 per cent, or $100 a tonne, over the past four months.

That largely reflects higher world crude prices; the New Zealand dollar in August was only 5 per cent higher against the United States dollar than it was in April.

Imports of plant and Machinery in the three months ended were 9.4 per cent lower than in the corresponding period last year - not a good sign for business investment.