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21/9/2018 — General
Steady deterioration in external accounts
By Dene Mackenzie

Tourism remains the saviour of New Zealand's external accounts which in June continued the trend of deterioration started in 2017.

In December 2016, the current account deficit hit a low of 2.2% of GDP. That had now climbed to 3.3% of GDP and is expected to have climbed to 4% by the middle of next year.

Without the services balance, particularly the returns from tourism, the current account would have climbed to 5.1% in the June quarter, BNZ head of research Stephen Toplis said.

“The good news is we expect the services balance to remain solidly in surplus for the foreseeable future. The bad news is we do not see it growing significantly from here, particularly as growth in inbound tourism is increasingly capacity constrained.”

Driving the balance further into the red had been the weakness experienced in New Zealand exports. By his estimate, goods export volumes were only 0.3% higher in the June quarter than they were a year earlier.

In stark contrast, import volumes soared 8.4%.

In part, the export weakness could be attributed to a weather-related dent in agriculture exports. But, once that had disappeared, there was still not a resurgence in export activity, he said.

Import growth reflected strong domestic demand in NZ. As domestic demand softened, import growth was expected to moderate but not so much as to reverse the negative trend in the goods balance.

The goods balance had been supported by a soaring terms of trade, Toplis said.

“The terms of trade now appears to be falling as export prices start to come under downward pressure. This will further exacerbate the rise in the goods deficit.”

Symptomatic of that was Wednesday’s GlobalDairyTrade auction in which the index fell a further 1.3% to be down 14.7% for the year. The near term risk to dairy prices was more weighted to the downside than up, he said.

The state of the accounts was worse than anticipated. Statistics New Zealand had published revisions for services exports up to the year ended March 2017 which intimated the current account deficit would be revised lower. That had happened.

Unfortunately, the data published this week showed revisions in the opposite direction for the period post March 2017, catching economists off guard, Toplis said.

The latest current account data did not change the BNZ view of the gross domestic product (GDP) results due out this week. The BNZ was forecasting a 0.6% increase in GDP for the June quarter while others were forecasting a rise of 0.9%.

Deterioration in the current account balance was not yet sufficient to dent the improvement in New Zealand's net international investments position, he said.

Net liabilities were 54.6% of GDP, a far cry from the 82.6% peak reached in March 2009. Even with the further increase in the current account deficit being forecast, external accounts were not likely to create any angst for the rating agencies.

*Dene Mackenzie is a Dunedin-based business commentator.

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BNZ’s Stephen Topliss. Source: Noted.