Current account deficit widening faster than Treasury expected, as record imports boost quarterly gap between what foreigners earn from NZ vs what we earn from abroad to record since GFC

Are we heading back to those bad old ‘borrow and spend’ days, or is it just a pothole that will soon be filled in?

The difference between what foreigners earn from New Zealand and what we earn from abroad widened during the first three months of the year, as record levels of imports led to the largest quarterly current account deficit since the turmoil nearly 10 years ago sparked by the Lehman Brothers collapse.

A seasonally adjusted deficit of $2.8 billion during the quarter was up $1.1 billion from December last year. “It was the biggest quarterly deficit since the global financial crisis hit world markets in 2008,” Stats NZ said.

The headline figure we use to compare ourselves internationally – current account deficit as a proportion of GDP – also showed a worsening in our position. At 3.1% of GDP, all the ground regained over the past year was lost again. This compared to expectations for the deficit to remain flat at 2.7%.

‘Wrong direction – back to those borrow & spend days’

The New Zealand dollar dropped on the news. Westpac economists noted the 3.1% deficit was still good by historical standards. ANZ economists said while the figures currently were “fine,” they were now again heading in the “wrong direction.”

They used the figures to continue a recent crusade on savings policy settings: “in some ways today’s figures are still a reminder of the bad old “borrow and spend” days. The economy needs to lift its savings performance and policy settings need to change to encourage it,” they said.

ASB economists were more relaxed. “We expect this was largely due to temporary factors,” they said. “Indeed, we expect the current account deficit to narrow steadily over 2017.” See full economist reaction below.

Don’t be surprised by the widening – Treasury in its May Budget update said it expected the deficit to widen from 2.9% last year, out to 3.9% of GDP at June 2021.

Treasury staffers even devoted a whole page to how they expected a deteriorating goods balance and declining income balance as New Zealanders resumed that national sport of spending and borrowing more than we earn.

They just didn’t think it would happen quite as fast as it has. The Budget documents forecast a deficit of 3% of GDP at June 2018, and 3.3% at June 2019 – the position we were in at the end of March 2017 was expected sometime between those dates.

Stats NZ helpfully always explains what we’re talking about. “The current account balance records the value of New Zealand’s transactions with the rest of the world in goods, services, and income. When we have a current account deficit, it implies foreigners earn more from New Zealand than we earn from overseas economies,” they say.

During the March quarter, New Zealand recorded the largest goods deficit since June 2008, widening $404 million to $1.2bn. “New Zealanders spent more on imports of goods this quarter than we earned from our exports of goods,” Stats NZ international statistics senior manager Daria Kwon said.

“The increased spending on goods, like cars and machinery, led to a record high value of imports this quarter.” And this wasn’t boosted by one-off items like airplanes. “We saw an increase in imports across most categories.”

In a sign of how the economy has refocused in recent years away from commodities and towards services exports like tourism, the goods deficit was helped out by a continuing services balance surplus – sort of.

The services surplus of $1 billion was down $180 million from the December quarter as services imports grew by $213 million while services exports grew by only $33 million.

Our ‘primary income’ deficit widened during the March quarter to $2.3 billion (up $222 million from December. “The larger income deficit was due to a decrease in income earned from New Zealand investment abroad and an increase in income earned by foreign investors in New Zealand,” Stats NZ said.

It wasn’t all bad news though.

The general stock take of the value of New Zealand-owned assets abroad against our liabilities showed an improvement.

New Zealand’s net international liability position was $154.8 billion, or 58.5% of GDP at 31 March, down from $157.5bn (60.4% of GDP) at the end of last year.

The value of New Zealand’s international assets at 31 March actually hit the highest value ever reported – up $3.1 billion to $242.8 billion. Our international liabilities continued to increase, but just by not as much – up $374 million to $387.6 billion.

New Zealand’s external debt position was $144.9 billion, or 54.7% of GDP at 31 March, against 55.3% of GDP at 31 December.

Economist reaction

Westpac’s Michael Gordon:

The current account deficit widened from 2.7% to 3.1% of GDP in the year to March. This was in contrast to market expectations of a stable deficit, but was similar to our forecast of -3.0% of GDP.

The widening of the deficit was due to a combination of factors. The goods trade deficit widened to $1.2bn in seasonally adjusted terms, as higher dairy export prices were outweighed by low export volumes and a rise in oil import prices. We expect the softness in export volumes to be temporary: milk production has recovered strongly in the early part of this year, which will drive higher export shipments from the June quarter onward.

The services balance narrowed, due to a strong rise in spending by New Zealanders overseas.

Finally, the investment income deficit widened, due to a sharp lift in profits earned by overseas-owned firms in New Zealand (excluding banks, which were steady for the quarter).

The widening in the current account deficit effectively puts it back to where it was a year ago. It remains remarkably low compared to history, and is consistent with the ongoing narrowing in New Zealand’s net overseas liability position.

Today’s data has no implications for March quarter GDP, which will be published tomorrow. We expect a 0.8% rise in the production measure of GDP.

ANZ economists:

BOTTOM LINE

The seasonally adjusted current account deficit was much larger than expected in Q1, coming in at $2.8bn for the quarter. As a percentage of GDP, the annual deficit widened from 2.8% to 3.1%. The figures are fine, but are now heading in the wrong direction.

While it was encouraging that external balance sheet metrics improved in the quarter as a share of GDP, in some ways today’s figures are still a reminder of the bad old “borrow and spend” days. The economy needs to lift its savings performance and policy settings need to change to encourage it.

KEY POINTS

The unadjusted current account was in surplus in Q1 to the tune of just $244m. While that was an improvement from the December quarter’s revised $2.415bn deficit, much larger surpluses have become commonplace in the first quarter, and this result was much lower than expected. As a consequence, the annual deficit widened to 3.1% of GDP in Q1 (from 2.8% of GDP in Q4).

In seasonally adjusted terms, the deficit came in at $2.836bn, which was significantly larger than Q4’s -$1.693bn outcome. It is the largest quarterly deficit since Q4 2008, and it breaks the trend improvement in the current account that began in 2015.

In terms of the components, there was a broad-based deterioration. The seasonally adjusted goods deficit widened by $404m (in large part due to strong goods imports), while the seasonally adjusted services surplus deteriorated by $180m. The investment income deficit also widened (from $2.079b to 2.639b) as a result of lower returns on New Zealand’s overseas investments and higher returns on foreigners’ investments in New Zealand.

While the data were disappointing overall, New Zealand’s net international liability position did improve. New Zealand’s net IIP now stands at -$154.8bn (58.5% of GDP). While that was largely due to market price changes in the quarter, it is still smaller than its peak of 84.0% in March 2000, and 70.6% as at the end of 2012. As a share of GDP, net external debt fell to 54.7%. However, it did actually rise by over $700mn in absolute terms. We are not necessarily surprised by that. It reflects the fact that banks have filled a domestic funding gap with increased overseas borrowing.

We are always a little reluctant to draw strong conclusions from balance of payments data for GDP figures (due tomorrow). There are just too many moving parts. But the biggest surprise for us today was the strength in goods imports. They were far higher than expected and suggest a larger drag from net exports (and hence a weaker GDP outturn). The uncertainty centres on whether or not this is offset by a more positive contribution from inventories.

ASB economists:

Current account pothole

Q1 current account deficit widens by more than expected.

However, we expect this was largely due to temporary factors.

Indeed, we expect the current account deficit to narrow steadily over 2017.

Summary and Implications

The headline current account deficit surprised over Q1 by widening more than expected on an annual basis. However, we expect that the current dip is more of the pothole variety as opposed to something deeper. Indeed, there were several temporary factors weighing down the deficit over Q1.

First up, agricultural production (and thus exports) was weak over recent quarters and has since rebounded. Moreover, NZ’s Terms of Trade are likely to set a record high this year. The combination of these two factors should send the goods balance back towards surplus by year end, lifting the current account balance with it.

Meanwhile, there are no implications from this release for our GDP or our OCR view. We expect a 0.5% Q1 GDP increase at tomorrow’s release.