NZ current account deficit not as bad as feared for December quarter

11.50am - By SIMON LOUISSON

UPDATED REPORT - The December quarter current account deficit of $1.92 billion announced today by Statistics New Zealand was not nearly as bad as feared.

Economists had forecast a deficit of $2.5 billion.

And in a double dose of better-than-expected news, SNZ said that the February trade balance came out in surplus of $136 million, far better than the economists' pick of a $90 million deficit.

The twin filip could send the New Zealand dollar back on an upward path.

The current account deficit -- which measures all New Zealand's earnings and payments with the rest of the world -- was $5.94 billion in 2003, little changed compared with the September 2003 year deficit but well ahead of the $4.66 billion deficit in 2002.

The annual deficit equates to 4.5 per cent of Gross Domestic Product, unchanged from at the September quarter. Economists had expected it to be up at 5.0 per cent and the Reserve Bank has predicted it would swell to 6.75 per cent of GDP next year. The forecasts may now have to be revised down.

The December quarter deficit was much improved on the $2.8 billion September quarter but a little worse than the $1.89 billion deficit in the December 2002 quarter.

SNZ's Johan Erasmus said the recent much stronger than expected terms of trade figures was the probable reason why economists had failed to correctly forecast the current account improvement.

SNZ said that increased receipts from foreign tourist expenditure in New Zealand, higher non-resident withholding tax, and increased returns from goods exported were the key factors in the narrower deficit.

These were partly offset by higher income paid to foreign investors during the quarter.

Tourist numbers increased by 6 per cent in the quarter and they spent more as well. Tourism receipts increased by $201 million in the quarter.

Although export prices fell due to the appreciating dollar, more than offsetting risings in world commodity prices and increased volumes, especially from the dairy sector, balanced the falls.

The overall result was a $128 million (1.8 per cent) hike in the value of exports in the quarter. Imports only rose by $48 million with increased volumes nearly offset by the stronger currency.

New Zealand's investments abroad rose by $4.6 billion during the quarter to $80.3 billion. Improved survey coverage of fund managers accounted for $2.3 billion of this rise. The rest of the rise was due to a net increase in the value due to currency effects and the rises of assets such as shares.

The value of foreign investment in New Zealand rose by $3 billion to $181.6 billion during the quarter including a $1.2 billion inflow of investment and a $1.8 billion increase due to exchange and valuation changes.

New Zealand's February year trade balance was $3.49 billion, slightly down from $3.62 billion in the January year but much worse than the $1.69 billion in the February 2003 year.

Imports in February were up 3.2 per cent to $2.39 billion while exports rose a healthy 9.5 per cent to $2.53 billion according to preliminary estimates.

The New Zealand dollar did not initially react to the news, remaining just above US65 cents.

Goldman Sachs JBWere economist Bernard Doyle called the surprisingly lower deficit "nice" but said it did not change the trend for a deteriorating outlook.

"It's going to become an increasing issue later this year and through 2005 for the New Zealand dollar and the sustainability of growth generally.

"On the trade deficit it's nice to have a little bit of a rebound, but it comes after two quite poor months. So it's kind of half expected, and I wouldn't treat it as a major piece of positive news flow."

BNZ economist Craig Ebert said the main message from today's data was "to question the Reserve Bank's forecast of the current account getting towards seven per cent of GDP in a year's time".

He said the latest figures made the Reserve Bank's forecasts look unlikely.

"At the very margin, they would give the bank some comfort that perhaps the slowdown they were expecting to see through the net export figures is not quite as dramatic as first feared."

However, UBS New Zealand chief economist Robin Clements was not convinced the worst was over yet.

"Certainly items like the terms of trade improved at the end of last year, export volumes were up, we had a bounce back in tourist spending post Sars, all that sort of thing, which is good, but...I'm still picking it (the current account deficit) will widen out to nearer six per cent over the next few quarters."

"I think it is a bit of a lull before the storm and that we haven't seen the peak yet."

- NZPA