Consumers who want it all overwhelm lagging exports

Free-spending consumers, struggling exporters and soaring oil prices combined to deliver a record $1.1 billion trade deficit last month.

For every $1 of exports shipped out, $1.47 worth of imports flowed in, nearly three times the normal gap for an August.

It pushed the annual trade deficit to $5.8 billion, up from $5.4 billion in the year ended July.

Economists said the widening trade gap suggested the broader current account deficit - $11.9 billion in the year to June or 8 per cent of gross domestic product - would get worse before it got better.

"It is deteriorating at an alarming rate," said ANZ National Bank chief economist John McDermott.

It reflected an economy badly out of balance - domestic consumption motoring along while exporters struggled in the face of a high exchange rate and, more recently, softening commodity prices.

"The policy prescription in these circumstances is an increase in interest rates. It is bitter medicine but we only have ourselves to blame," McDermott said.

Consumers needed to curb their "I want it all and I want it now" spending behaviour.

Prices in the wholesale money markets imply a view that the Reserve Bank is more likely than not to raise interest rates next month. If not then, the markets see an 80 per cent chance of higher rates by the end of the year.

In the three months to August 31, compared with the same period last year, imports of crude oil were up $150 million or 32 per cent. That is in spite of a 7 per cent rise in the exchange rate over the same period which makes imports cheaper.

Imports of consumer goods were $192 million (8.9 per cent) higher, cars $105 million (13 per cent) higher and imports of transport equipment, boosted by the new Cook Strait ferry, $183 million (46 per cent) higher.

Imports of plant and machinery, the key to relieving capacity constraints and lifting the sustainable growth rate, were only $18 million or 1.2 per cent higher than the same period last year. But Westpac economist Nick Tuffley said imports of capital goods had surged in the second half of last year; those higher levels of imports were at least being maintained.

While total imports last month, at $3.46 billion, were 12.7 per cent up on August last year, exports, at $2.36 billion, were 0.2 per cent down.

Exports had been trending down since April, reversing the rising trend of the previous year and a half, Statistics New Zealand said.

Bank of New Zealand economist Craig Ebert said the combination of boisterous import growth and stalling exports suggested the current account deficit, already the worst in the developed world, would deteriorate further.

"This screams for a lower currency to cushion exporters and those competing with imports. But this reinforces the need for firm, perhaps higher, interest rates in order to get on top of still obviously hot domestic spending," Ebert said.

Economists expect the two-speed economy will also been reflected in tomorrow's gross domestic product figures.

"Domestic spending continues to be underpinned by a strong labour market and consumers' willingness to buy now and pay later," McDermott said.