NZ: Balance of Payments - Q4 2000
Data Flash (New Zealand)
Key Points The current account deficit for Q4 2000 was $1,863m, compared with market expectations of a deficit of $1,400m and our own forecast of a deficit $1,503m. The deficit for Q3 2000 was also revised up by approximately $60m.
The trade surplus was $188m - a better than expected outcome due to stronger than forecast export receipts. Import values were in line with expectations. The balance on services recorded a deficit of $76m, compared to our expectation of a small surplus. Much stronger than expected spending by New Zealanders travelling overseas appears to have been the key factor explaining the forecast error (in turn reflecting the impact of the weak NZD on the cost of travel). In seasonally adjusted terms, the surplus on the combined goods and services balance improved to $427m in Q4 from $243m in Q3.
The key factor explaining the worse than expected current account deficit was a much higher than expected deficit on investment income. The strong performance of the New Zealand economy in late 2000, combined with weaker performance elsewhere (especially Australia), has resulted in a decline in direct investment credits (income from New Zealand investments abroad) and a very strong rebound in direct investment debits (income earned by foreigners from their investments in New Zealand).
The current transfers surplus was $528m, consistent with expectations. In seasonally adjusted terms, the deficit on the combined investment income and transfers balance was $1,990m in Q4 - a sharp deterioration compared with the $1,464m deficit recorded in Q3.
As a result, in seasonally adjusted terms, the overall current account deficit was $1,563m in Q4, compared with $1,221m in Q3.
On an annual basis, the current account deficit was $6bn - around 5.4% of GDP. This compares to a deficit of $6.9m a year earlier. The $0.9bn annual improvement reflects a $2.2bn improvement in the trade surplus (partly explained by import of a $0.6bn naval frigate during the previous year) and a $1.3bn worsening in the investment income balance (largely reflecting the increasing costs of funding ongoing current account deficits).
Market Reaction: The NZD displayed little reaction to the worse than expected outcome, with markets remaining more focused on events offshore.
Comment Taken at face value, the latest balance of payment release suggests that the prospects for a further significant reduction in the current account deficit have deteriorated somewhat over recent months. This conclusion is reinforced at an analytical level by developments in the New Zealand and global economies. The strengthening domestic economy raises the prospects of increasing demand for imports, notwithstanding the weak NZD (indeed, imports in January were a touch higher than we had expected). Similarly, weakening growth in many of New Zealand's trading partners will have a dampening influence on demand for New Zealand's exports, including tourism. In addition, the divergence in economic cycles raises the prospect of a more significant deterioration in the investment income balance - the first signs of which appear evident in today's figures.
That said, we are hesitant to draw too strong a conclusion from today's outcome. Given the volatility of investment income data (which, reflecting numerous measurement difficulties, is subject to substantial revision), there is danger in simply extrapolating the latest outcome. Therefore, we continue to expect a further improvement in the annual deficit from current levels, driven by ongoing improvement in the trade balance. Our preliminary estimate is that the annual current account balance will fall below 5% of GDP in Q1 2001, with a further improvement into the 3 to 4% range achievable over the following 12 months. However, we will continue to monitor both merchandise trade and tourism arrivals data for signs that the global slowdown is having a more significant impact on net export prospects than has so far been the case.
Darren Gibbs, Senior Economist, New Zealand, (64) 9 351-1376