Current Account Deficit – A temporary improvement?
Current Account Deficit – A temporary improvement? December quarter Current Account statistics, which were released this morning, were a welcome relief from the gloom and doom of the last few months. The good news is that the deficit has fallen from a record high of 9.3% of GDP for the March 2006 year to 8.4% for the year ended September 2007 and 7.9% for the latest year. The bad news is that our deficit is still one of the highest of the 30 OECD countries. OECD - Largest Current Account Deficits 13.90% 11.90% 9.80% 8.10% 7.90% 7.70% 6.20% 5.60% 4.90% 4.60% New Zealand has a chronic Current Account or Balance of Payments problem because we spend far more than we earn overseas and have substantial interest commitments on offshore borrowings. In 2007 we spent $1.25 offshore for every $1.00 we received and the country’s overseas debt has surged from $131.8 billion to $209.5 billion over the past five years. Much of this has gone into residential housing instead of revenue earning enterprises. As a consequence the investment component of the Current Account – the difference between the outflow and inflow of interest and dividends – continues to be the biggest contributor to the deficit. In 2007 the investment sector comprised $12.5 billion of the total Current Account deficit of $13.8 billion. The international credit crunch will have a negative impact on the Current Account as the major trading banks are reporting that they are having to pay an additional 1% for offshore funds and this upward trend is expected to continue. The clear message for the New Zealand economy is that a heavy reliance on overseas borrowings has negative consequences for the Current Account deficit, particularly when interest rates are rising. Brian Gaynor – 27 March 2008
As a % of GDP
Iceland
Greece
Spain
Portugal
New Zealand
Turkey
Australia
United States
Poland
Hungary
The improved performance in the December quarter was primarily due to higher exports, (mainly dairy and Tui oil) partly offset by a rise in petroleum, food and beverage imports.