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Deutsche Bank - NZ: Current Account - June Quarter

Deutsche Bank - NZ: Current Account - June Quarter 1999

Latest Research from Deutsche Bank - Economic Note (New Zealand)

Economic Note (New Zealand) NZ: Current Account - June Quarter 1999

Key Points

The current account deficit for the year to June 1999 fell to $6.3bn ( 6.3% of GDP), from the revised deficit of $5.7bn in the March 1999 quarter. This compared with average market expectations for an annual deficit of $6.5bn.

The forecast error largely reflected revisions to historical data. On an annual basis the deterioration in the deficit largely reflected:

- a reduction in goods balance reflecting poor export performance and strong import growth,

- a worsening in the international investment position due to falling credits from NZ subsidiaries overseas,

- somewhat offsetting these negatives, the services balance improved reflecting an increase in overseas visitor numbers and a rise in transfers on the back of a rise in non-resident withholding tax received from overseas.

Market Reaction: Reacting to the better-than-expected headline annual deficit outturn, the NZD found some support immediately following the release.

Current Account (yr ended)::::::Jun-98::::::Sep-98::::::Dec-98::::::Mar-99::::::Jun-99

Merchandise Exports 22,026::::::22,504::::::22,909::::::22,994::::::23,229

Merchandise Imports:::::: 20,149::::::20,515::::::20,991::::::21,343::::::21,985

Trade Balance:::::: 1,877:::::: 1,989:::::: 1,918:::::: 1,651:::::: 1,244

Services Exports:::::: 6,679:::::: 6,813:::::: 6,954:::::: 7,437:::::: 7,614

Services Imports:::::: 8,006:::::: 8,318:::::: 8,475:::::: 8,657:::::: 8,571

Services Balance:::::: -1,327::::::-1,505::::::-1,521::::::-1,220:::::: -957

Total Investment Credits:::::: 1,478:::::: 1,125:::::: 812:::::: 314:::::: 16

Total Investment Debits:::::: 6,963:::::: 6,621:::::: 6,707:::::: 6,942:::::: 6,912

Investment Income Balance::::::-5,485::::::-5,496::::::-5,895::::::-6,628::::::-6,928

Transfer Balance:::::: 545:::::: 508:::::: 622:::::: 452:::::: 569

Current Account Balance:::::: -4,849::::::-5,043::::::-4,980::::::-5,697::::::-6,292

% of nominal GDP:::::: -4.9:::::: -5.1:::::: -5.1:::::: -5.8:::::: -6.3

Comment

The June quarter annual current account deficit of $6.3bn was slightly better than average market expectations for a deficit of around $6.5bn. However, the improvement in the annual deficit largely reflected the impact of substantial revisions to historical data. In particular, the annual deficit for the March quarter was revised down from 6.4% of GDP to 5.8%.

The significant revisions largely reflected improved data from Statistics NZ's annual benchmarking exercise - the newly introduced IMF methodology, which excludes the effect of migrant transfers, has not been a major factor in the revisions. The largest effect of these changes has been to substantially improve the historical investment income and services balances.

However, reflecting the lowering of the annual base level of the deficit, the deterioration in the balance between the March and June quarters is now greater than previously estimated, suggesting that the short-term trend in the deficit has deteriorated faster than previously expected.

Consistent with this trend, we continue to expect the current account deficit to worsen over the year ahead. In particular, despite robust export expectation surveys and a positive terms of trade, we anticipate that any medium-term improvement in the trade balance is likely to be constrained by continuing strong import growth. Moreover, the on-off importation of a naval frigate in the December quarter is likely to see the annual deficit peaking at around the 7.5% of GDP.

Further frustrating a trend improvement in the deficit is likely to be a worsening in the investment income balance, reflecting a recovery in NZ company earnings, rising world interest rates, as well as the funding costs associated with continued high deficits.

On the whole, this suggests that any improvement in the balance of payments position is likely to be gradual, with the annual deficit projected to remain stubbornly above the 6% of GDP level over our two year forecast horizon.

The next key piece of data will be the release of June quarter GDP (24 September), which we expect to show an increase of 0.5% qoq - this is in line with RBNZ and average market expectations. An outturn at around our expectations will reinforce our view that the Bank is likely to keep the OCR unchanged at their 29 September review. However, we still expect the RBNZ to raise the cash rate by 50bp to 5.0% at the 17 November MPS.

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