KEY POINTS:
Lower profits from foreign-owned companies, especially banks, limited the deterioration in the current account deficit in the first three months of the year.
The gap between what New Zealand spends and what it earns internationally was $3.6 billion in the March quarter, seasonally adjusted, or $50 million more
than in the previous quarter, to December.
But the annual deficit narrowed to $13.9 billion or 8.5 per cent of gross domestic product, from $14.5 billion or 9 per cent of GDP in December.
Measured against the size of the economy, the deficit peaked in June last year at 9.7 per cent. But it remains very high by historical and international standards.
First NZ Capital economist Jason Wong said investors were not yet concerned about the size of the deficit, but as soon as sentiment towards the New Zealand dollar turned sour the deficit would be used as an excuse to sell the kiwi.
An increase in exports - caused by large volumes of dairy products - did not keep pace with an increased appetite for imports in the March quarter.
The surplus on services, mainly tourism, halved and transfers fell sharply, reflecting a drop in non-resident withholding tax on dividends to overseas investors.
But the big factor in the deficit, as ever, was the gap in investment income - $2.8 billion in March compared with $3.15 billion in December.
The $345 million improvement in the investment income balance largely reflected a $215 million fall in profits of the New Zealand subsidiaries of foreign companies, mainly banks, and a $94 million fall in dividends to portfolio investors overseas.
On March 31, New Zealand owed the rest of the world $145 billion or 89 per cent of GDP, $15 billion more than a year earlier.
Goldman Sachs JBWere economist Shamubeel Eaqub says New Zealand's demographics, per capita GDP and public debt mean the sustainable level would be closer to 57 per cent.
Getting the net debt position down to a sustainable level would require something like a 30 per cent depreciation in the currency, a long period of weak economic growth and dramatic changes in savings behaviour, he said.
Bank of New Zealand research head Stephen Toplis said the trade and current account deficits would continue to shrink because of the surge in dairy prices.
He said that in the year to March, the terms of trade - the ratio of export to import prices - rose 5 per cent.
"We reckon the increase for the following 12 months will be double this."
But this would not be enough to produce a trade surplus.
The high exchange rate was putting the surplus from travel under pressure, he said.
New Zealanders were flocking overseas, and potential visitors to the country were being put off by rising costs.
He expects that trend to continue in the year ahead, but to be offset by an improving, though still negative, investment income balance.
"It's probably for an unwelcome reason - that foreign owners of New Zealand assets are seeing their returns peaking as New Zealand businesses suffer a domestic profit squeeze."
The BNZ expects the current account deficit to shrink to less than 7 per cent of GDP early next year.
"But if 6 per cent plus is as low as it can get during a massive terms of trade jump, it portends a further period of current account concern for the economy," Toplis said.
The figures
* The current account deficit was $13.9 billion in the year to March, equivalent to 8.5 per cent of GDP.
* That pushed foreign claims on the economy to $145 billion.
* Such figures are not sustainable, economists say.
* But financial markets have yet to react by selling the kiwi dollar.