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BoP & International Investment Position - Q1 2001

Data Flash (New Zealand)
NZ: Balance Of Payments And International Investment Position - Q1 2001

Key Points

A current account surplus of $95m was recorded in Q1 2001 - the first quarterly surplus since 1994. This result compared with market expectations of a deficit of $260m and our own forecast of a deficit of $40m.

The trade surplus was $1,092m - a better than expected outcome due to stronger than forecast export receipts - and was the key factor underpinning our overall forecast error. Import values were broadly in line with expectations.

The balance on services recorded a surplus of $905m - a slightly better than expected result. Strong tourism inflows and the weak NZD resulted in a $75m (s.a.) increase in exports of travel services.

In seasonally adjusted terms, the surplus on the combined goods and services balance more than doubled to $888m in Q1 from $433m in Q4.

The balance on investment income recorded a deficit of $2,003m, a little worse than we had expected. The key factor explaining this result was lower earnings from New Zealand residents' direct equity investments in foreign enterprises (no doubt reflecting the weakening world economy).

The balance on current transfers recorded a surplus of $102m.

In seasonally adjusted terms, the deficit on the combined investment income and transfers balance was $1,897m in Q1 - an improvement on the Q4 outcome.

As a result, in seasonally adjusted terms, the overall current account deficit was $1,007m in Q1, compared with $1,578m in Q4.

On an annual basis, the current account deficit was $5.3bn - around 4.8% of GDP. This compares to a deficit of $7.4m a year earlier. The $2.1bn annual improvement reflects a $2.9bn improvement in the trade surplus (partly explained by import of a $0.6bn naval frigate during the previous year) and a $0.2bn improvement in the services balances, offset to some extent by a $1.0bn worsening in the investment income balance (largely reflecting the increasing costs of funding ongoing current account deficits).

New Zealand's net international liabilities fell to $86.5bn (75.5% of GDP) from $88.3bn in Q4 2000 (78.1% of GDP).

Market Reaction: Although the outcome was better than expected, the NZD displayed little reaction.


Today's result reaffirms the trend improvement in New Zealand's current account deficit that we have been forecasting for some time. In seasonally adjusted terms, the latest quarter's result equates to annualised deficit of 3.6% of GDP. This compares very favourably with an annualised deficit of 6.4% of GDP in Q1 2000.

We expect the annual deficit to head towards this lower level over the course of 2001. Indeed, our preliminary estimate is that that the annual deficit will fall to 3.9% of GDP in Q2, from 4.8% in Q1. These figures will be reported on 29 September. A further reduction to around 3.3% of GDP is expected by year-end. However, in seasonally adjusted terms, Q2 2001 seems likely to represent the low point in the current cycle, so that the annual deficit is expected to move back above 4% of GDP over the course of 2002.

Revaluation adjustments aside, such a deficit would, nonetheless, be low enough to broadly stabilise New Zealand's net internal liabilities as a proportion of GDP.

A more sustained improvement in the current account deficit to 3% of GDP or below would require, amongst other factors, a greater response from the non-primary export sector to the low NZD than appears evident so far. Monthly trade data will be watched closely for any signs of any lagged impacts from the weakening in the NZD over the past two years or, less favourably, a further slowing in volume growth as the global economic slowdown starts to bite.

While the NZD showed little immediate response to the data, the favourable outturn reinforces our view that the medium-term fundamentals remain NZD positive. A Q1 GDP outturn at or around market expectations (+0.7% qoq) on Friday will be important in maintaining positive sentiment towards the unit. Our forecast is for growth of 0.8% qoq.

Darren Gibbs, Senior Economist, New Zealand

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