Current account deficit to 8.9% of GDP last year

New Zealand's current account deficit widened to 8.9% of GDP last year

In the year to December, New Zealand's current account deficit widened to a new record high of NZ$16.1 billion, from a revised NZ$15.5 billion in the year to December 2007. As a share of GDP, the deficit expanded to a colossal 8.9% in the year to the December quarter, from 8.6% in the year to 3Q. In 4Q alone, however, the deficit shrank to NZ$4.0 billion in 4Q08 (JPMorgan -$5.0 billion, consensus -$4.0 billion), from NZ$6.0 billion in the September quarter.

In 4Q, there were improvements across all of the main current account components. The net goods deficit was NZ$529 million, a massive improvement from the NZ$2.0 billion deficit reported for the previous quarter. Merchandise exports soared 19%, owing mainly to higher dairy volumes and prices, as imports dropped 3%. The net services deficit was NZ$421 million, down sharply from the NZ$1.0 billion deficit recorded for the September quarter (service exports rose - mainly owing to higher inbound tourism - as imports fell). Similarly, the deficit on net income dropped to NZ$3.2 billion, from NZ$3.3 billion in the previous quarter.

New Zealand's Finance Minister Bill English this week described the current account deficit as "uncomfortably large". Indeed, the huge external imbalance leaves New Zealand's economy more vulnerable than most, owing to the enormous amount of foreign capital needed to make up for the deficiency of domestic savings. Unfortunately, there is unlikely to be further material improvement in the deficit in the near term. While the recession in New Zealand, which we suspect is roughly at its mid-point, means imports probably will continue to fall, the worsening global environment means exports are likely to fall even more sharply.

ENDS

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