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Home / Business

Gap keeps widening between NZ's spending and earning

Brian Fallow
By Brian Fallow
Columnist·
30 Jun, 2000 03:24 AM3 mins to read

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By Brian Fallow

WELLINGTON - The current account deficit went from bad to worse in the March quarter and economists expect the gap between what New Zealand spends and what it earns to get wider yet.

The benefits of a better than usual performance by the tourist sector were swamped by deteriorating
merchandise trade, the drying up of migrants' transfers and the ongoing drag of a massive ($6.9 billion) net outflow of investment income.

The deficit for the year to March 1999 widened to $6.4 billion from $6 billion in December.

That is likely to equate to 6.4 per cent of gross domestic product and is at the high end of market expectations.

It has languished in a range of 6.1 to 7.1 per cent of GDP for the past two years.

Economists forecast a deterioration in the current account this year as the effect of last year's recession wane and the export sector lags behind the domestic economy's recovery.

Bank of New Zealand economist Peter Jolly said: "With the deficit now at 6.4 per cent of GDP it is not difficult to contemplate a return to near 7 per cent by September 1999, the same level as late-1997."

Deutsche Bank expects the deficit to peak at about 7 per cent of GDP in March 2000, driven by a continuing deterioration in the merchandise trade balance.

Statistics New Zealand said this balance of exports over imports declined $242 million to $156 million, seasonally adjusted, in the latest quarter, reflecting weak commodity prices and a firmer kiwi dollar.

But the balance on services, chiefly tourism and air travel, improved $249 million, though it remained in deficit by $119 million. "There were a record number of tourists, they stayed longer and spent more."

Net investment income remained much the biggest contributor to the current account deficit. It declined $226 million in the quarter, driven equally by improved profits on foreign investment in New Zealand and larger losses on New Zealand investment abroad (much of which is in sectors like forestry affected by weak commodity prices).

Income earned on foreign direct investment (FDI) in New Zealand, at $1.1 billion for the quarter, was the highest since December 1997.

For the first quarter in two years a majority of the profits of FDI companies were retained rather than paid out in dividends.

But for the year ended March, however, all but $133 million of FDI profits of $2.89 billion (4.6 per cent) has been paid out in dividends.

With corporate earnings recovering along with the economy as a whole, the investment income deficit is expected to widen further, contributing to further deterioration in the current account.

Migrants' cash transfers, which until 1996 mitigated the effects of a continuing deterioration in investment income, have all but dried up. There was a net inflow of $5 million in the March quarter.

The dollar fell about a third of a cent yesterday after release of the figures, ending the day around US53.1c.

Mr Jolly said the current account deficit would remain a downwards force on the New Zealand dollar in 1999, but positive offsets were enough to suggest it would stay in a US52c to 57c range for some time yet.

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