Current Account and International Investment
Data Flash (New Zealand)
Current Account and International Investment Position - Q1 2002
Today's surprisingly good current account deficit figures paint a much-improved picture of the state of New Zealand's external accounts. While the trade balance is beginning to deteriorate, the services balance has moved into positive territory for the first time since at least 1965. In addition, the investment income also has also improved substantially, in large part reflected better performance on the credits side (improved profitability of New Zealand owned investments overseas).
Going forward, the trend in the current account deficit will be one of deterioration, however, led by a worsening trade balance.
A trade surplus of 2.6% of GDP in the year to Q1 2002, is expected to give way to a surplus of 0.7% over year to Q1 2003. This reflects our expectation of a decline in net export volumes and, more substantially, a 5.1% decline in the terms of trade (a realisation of the decline already seen in spot commodity prices).
To some extent the Q1 services balance is flattered by the early timing of Easter, which boosted tourism credits (some downward correction will therefore occur in Q2). More substantially, the stronger NZD will reduce the average NZD spend by tourists and, with a lag, the number of tourists as well. Therefore, while we expect the recent improvement in the services balance to be largely sustained, we are less confident of further improvement.
The implied return to foreigners on their holdings of net assets in New Zealand is currently towards the low end of past experience. We suspect that this situation will not be sustained (indeed it is entirely possible that some of this improvement will be revised away at some point). Moreover, ongoing (and increasing) current account deficits will also need to be funded. Therefore, we think that the investment income deficit will rise from current levels.
Given the above, we think that the 2.2% annual current account deficit for the year to Q1 2001 - the best result since 1989 - will prove to be as good as it gets. Our expectation is that the current account deficit will rise to 2.5% of GDP in Q2, and to 3.5% of GDP by year-end, before settling a little around 4.0-4.5% of GDP during 2003 (not too different to New Zealand's recent historic average).
A current account deficit of 4.5% of GDP and trend growth in nominal GDP of around 5% (3% real growth and 2% inflation) would, over time, see New Zealand's net external liabilities rise to 94% of GDP from their current level of 76.7% of 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 continue to remain one of the less favourable factors recorded on New Zealand's overall macroeconomic scorecard. While we do not expect this to temper investor enthusiasm for the NZD in the current environment (especially against the USD), over the medium-term, a large external deficit clearly poses ongoing risks.
Looking ahead to tomorrow's Q1 GDP data, the much better than expected services balance contained in today's balance of payments release has added a degree of the upside risk to our forecast that the economy grew 1.1% qoq (market also 1.1% qoq), with our expenditure-based estimate of GDP growth now sitting at 1.5% qoq.
A current account surplus of $0.7bn was recorded in Q1, compared with market expectations of a $0.2bn deficit.
Combined with favourable revisions to earlier data, the annual deficit fell to $2.7bn in Q1, compared with market expectations of $4.0bn. This equates to 2.2% of GDP - the lowest level since Q2 1989.
Over the past year the current account deficit has improved by $2.6bn, driven by a $0.9bn increase in the trade surplus, a 0.7bn increase in the services balance and a $1.2bn improvement in the investment income balance. The transfers balance declined by $0.1bn.
In seasonally adjusted terms, the Q1 current account deficit was just 1.5% of GDP.
New Zealand's net international liabilities (external balance sheet including debt and equity) fell by NZ$912 million to $92.3 billion during the Q1. The ratio of net liabilities to GDP fell to 76.7% from a substantially upwardly revised Q4 figure of 78.6% (the upward revision mainly reflected an increase in the estimate of foreign direct and portfolio investment in New Zealand).
Over the past year, the value of New Zealand's assets abroad has fallen from $79.8bn to 79.1bn, while the value of foreigner's assets in New Zealand has risen from $164.8bn to $171.4bn. Nonetheless, the investment income deficit - measuring the net flow of income derived from these stocks - has improved by $1.2bn over the past year, suggesting that the New Zealand's foreign assets have become relatively more profitable.
Statistics New Zealand estimate that 94% of New Zealand's foreign currency overseas liabilities are subject to some form of hedge.
Darren Gibbs, Senior Economist, New Zealand