NZ On The Brink

Economists are warning that an adjustment in New Zealand's current account is imminent, and if not carried out voluntarily it will be forced on the country.

Figures out from Statistics New Zealand (SNZ) today show the current account deficit was $6 billion in the September quarter.

The current account, also known as the balance of payments, measures all of New Zealand's transactions with the outside world.

The annual deficit was $15.5b, which was 8.6 percent of gross domestic product, up from 8.4 percent of GDP in the June year and 8 percent in the March quarter.

"Given the credit-centric nature of the shock facing the global economy, New Zealand's current account cannot continue its current trajectory," ANZ bank said after the release of today's data.

"An adjustment is imminent, either undertaken voluntarily or forced up on it externally."

The deterioration in the annual balance was entirely due to a growing goods and services deficit, which rose in annual terms from $2b to $2.7b.

The investment income balance improved slightly courtesy of a fall in profitability of foreign firms operating in this country.

While an improvement in the seasonally adjusted deficit was encouraging, much of the improvement could be put down to the lagged effect of high commodity prices, ANZ said.

Seasonally adjusted, the September quarter deficit was $4.1b, $571 million smaller than the June quarter deficit.

With this country's main commodity prices falling, any improvement in the trade balance would rely on a sharp fall off in import volumes, ANZ said.

"Years of imbalanced growth have resulted in a ballooning current account deficit, which by definition means we are spending much more than we save as a nation."

Running large current account deficits was not an issue in an environment where credit was cheap and abundant, as was the case in the first part of the decade.

But the economy was now in a more vulnerable position, with credit much more expensive and difficult to come by.

Typically, a current account adjustment had two distinct dynamics -- a period of weak activity in the domestic economy, and a depreciating currency.

"Both of these dynamics have already begun, but considering the large starting position for the external balance, and the worst credit shock in 80 years, there is still some way to go yet."

During the September quarter, New Zealand's investment income deficit shrunk by $396m to $3.2b.

ASB economists said the investment income deficit was by far the biggest component of the current account, so a nascent turning was positive, even if much of the cause of it was a weak domestic economy.

The weakening domestic economy was starting to have an impact on the equity earnings going to foreign owners of New Zealand corporates, somewhat perversely helping in containing the deficit.

Income paid out to foreign creditors did increase moderately relative to a year ago, but with interest rates now falling that component of the current account would increasingly become less of a drag than during the interest rate tightening cycle.

Private sector debt accumulation would be modest, although sovereign debt issuance was set to increase.

Source - National Business Review, NZ