Deficit threatens dollar

The overseas trade figures went from bad to worse last month.

Imports at just under $3 billion were 9.3 per cent up on March last year, while exports at $2.8 billion were only 0.5 per cent higher than a year ago. Normally there is a trade surplus in March.

The annual trade deficit widened to $4.36 billion from $4.12 billion for the year ended February.

Reserve Bank Governor Alan Bollard yesterday pointed to "very robust imports" as an indicator of the strength of domestic demand.

Given his concerns about capacity constraints in the economy, he might take some comfort from the fact that last month, and in the latest quarter, imports of plant and machinery grew faster than imports of consumer goods.

"Investment is growing rapidly as capacity-constrained companies make use of reasonable cash flows, relatively low financing costs and the strong dollar to import plant and machinery," Bank of New Zealand economist Stephen Toplis said.

But the trade deficit was making the current account balance look uglier and uglier, posing an increasing threat to the dollar.

As it has been the strong exchange rate which has kept the lid on inflation, the last thing the Reserve Bank needed was an inflationary shock from a rapidly falling currency.

Toplis said to complete the nerve-racking nature of the report was the news that the landed price of crude oil imports surged 29.2 per cent for the quarter, "another reminder of the imported cost pressure now hitting the economy".