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Data Flash: Current Account

Data Flash (New Zealand) Current Account and International Investment Position - Q4 2001

Current Account (Q4)

A current account deficit of NZ$1.84 billion was recorded for the December quarter, somewhat worse than average expectations of $1.6 billion.

The annual deficit reduced marginally from 3.3% of GDP to 3.2% ($3.8 billion). Over the past year the current account deficit improved by $2.3 billion, driven mainly by a $2.2 billion increase in the trade surplus.

In seasonally adjusted terms, the current account deficit widened considerably in Q4. Annualising the quarterly seasonally adjusted result, the deficit rose from 2.3% of GDP in Q3 to 4.8%.

There was no market reaction to this release.

International Investment Position (31 December 2001)

New Zealand's net international liabilities (external balance sheet including debt and equity) fell by NZ$812 million to $88.8 billion during the December quarter. The ratio of net liabilities to GDP fell 76.6% of GDP to 75.0%.

The rise in net international liabilities of $517 million over the past year compares to a current account deficit of $3,800 million over the same period, suggesting valuation changes of around $3.3 billion in New Zealand's favour.

Comment

Today's data confirmed that the positive trend of a rapid contraction in the current account deficit, which had started in mid-2000, bottomed out late last year. Our forecast shows a renewed widening of the external deficit to 4.5-5.0% of GDP over the course of 2002, driven largely by a worsening trade account. Strong domestic demand is expected to cause import growth to exceed the increase in export volumes. Furthermore, falling global prices for food commodities are forecast to lead to a 5% reduction in the terms of trade this year. Those factors combined are expected to lead to a halving of the trade surplus in 2002.

A recovery in export volume growth and the terms of trade in 2003 should prevent a deterioration of the current account deficit beyond 5% of GDP, with the cyclically adjusted long-run trend value likely to be around 4% of GDP. The estimated trend deficit consists of a surplus in the goods and services balance, which is more than offset by a large investment income deficit (around 6.5% of GDP). The latter reflects the servicing cost of New Zealand's high level of net external liabilities (75% of GDP).

A trend deficit of 4% of GDP during the current cycle compares to a deficit of around 6% prior to the significant structural downward adjustment in the real exchange rate. While that is a positive development, a current account deficit of 4% of GDP and trend growth in nominal GDP of around 4.75% will still lead to a renewed gradual increase in the ratio of external liabilities to GDP - unless net valuation changes to external assets and liabilities always work in New Zealand's favour, which is unlikely. That suggests that the external deficit will remain one of the less favourable factors recorded on New Zealand's overall macroeconomic scorecard.

Looking ahead to tomorrow's Q4 GDP data, the worse than expected services balance contained in today's balance of payments release has removed some of the upside risk to our forecast that the economy grew 1.2% qoq.

Ends

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