New Zealand's current account deficit shrinks more than economists predicted

New Zealand’s seasonally adjusted current account deficit shrunk $1 billion dollars during the June quarter, declining to $6.7 billion from $7.7 billion in the three months prior, Statistics NZ says. 

A current account deficit reflects that New Zealand is spending more than it's earning overseas. 

The deficit ranged between 1% and 4% of gross domestic product (GDP) in the decade prior to the pandemic, but expanded to be over 8% in late 2022. 

The Treasury has said this was due to the disruption caused by the pandemic, poor agricultural production, and higher global interest rates.

But now, the turnaround has begun and the deficit has shrunk over the past two quarters. 

At $29.8 billion, the annual current account deficit was 7.5% of GDP in June 2023, compared to 8.8%, or $33.8 billion, at the end of last year. This was slightly better than had been forecast by many economists which expected the deficit to land just below 8% of GDP. 

Miles Workman, an economist at ANZ Bank, said the narrower current account deficit was “welcome news” but the accounts were still “severely out of balance”.

“From this starting position, New Zealand is still vulnerable to a terms of trade shock and/or drought that could result in unsustainable deficits sticking around for too long,” he said. 

Using the percentage to GDP measure shows how significant the nominal deficit is in the context of the overall economy.

While 7.5% is an improvement on the previous four quarters, the deficit remains at levels not seen since 2008. The current account deficit ranged between 6.6% and 7.8% from 2006 until 2009.

In nominal terms, the annual trade deficit widened by $1.2 billion in the year ended June 2023 as NZ imports increased by $8.4 billion to $85.8 billion.

“Fuel, including diesel, petrol, and jet fuel, was the main contributor to the increase in goods imports, driven by increases in both the price and volume of fuel,” a Stats NZ manager, Paul Pascoe said.

Good exports increased $5.5 billion to $73.3 billion, particularly driven by dairy products, including milk powder, butter, and cheese.

Service export growth outpaced imports with a $9.8 billion increase to $23.8 billion, while imports grew $7.4 billion to $29.9 billion. 

Spending by overseas visitors in New Zealand increased $6.7 billion to $10.3 billion, while the amount spent by New Zealanders overseas increased just $3.5 billion to $5.7 billion.

“In the June 2023 year, overseas visitors increased their spending almost twice as much as New Zealanders increased their spending overseas,” Pascoe said.

The primary income deficit widened by $1.3 billion to $11.6 billion, showing overseas investors were earning more from New Zealand than vice versa. 

Income earned by overseas investors increased $3.2 billion in the year ended 30 June 2023, while income earned by New Zealand investors from overseas increased $2.0 billion.

“The recent increases in interest rates have contributed towards larger interest payments to foreign investors on their loans, deposits, and bonds held in New Zealand. There was also an increase in holdings of New Zealand issued bonds by foreign investors in the June 2023 year,” Pascoe said.

ANZ’s Miles Workman said the recovery in international tourism and education was progressing well and the FIFA Women's World Cup was likely to boost the next set of quarterly numbers. 

But potential consumers were also facing economic difficulties at home which may discourage them from shelling out for a trip or a service in New Zealand. 

“For the services balance to flip back into surplus, exports need to lift beyond pre-COVID levels and that may be a hard slog in the context of a slowing global economy,” he said in a note.  

Goods exports had been battling bad weather, regulatory change, labour constraints, and shipping disruptions.

Export prices had been falling relative to import prices and recent dairy auction results suggested there could be more pain to come.

Without an obvious path to boost export volumes or prices in the short term, New Zealand will likely rely on cooling domestic demand to bring some balance back.