Oil, farm spending widen balance of payments deficit to worst in a decade

The rising cost of imported fuel and a farming equipment spree have widened the balance of payment deficit to its worst in a decade.

Stats NZ says the seasonally adjusted current account deficit for the March 2018 quarter of $3 billion is the largest since the 2008 global financial crisis. 

The current account balance records the value of New Zealand’s transactions with the rest of the world in goods, services and income.

ANZ economists say the wider deficit – an increase of $1b from the December quarter – is mainly due to the goods balance, as services, boosted by tourism, are steady.

The deficit of 2.8% of gross domestic product (GDP) – valued at $7.9b – in the March 2018 year compares with the 7.8% peak in 2008 and a deficit of 2.6% of GDP a year ago. The historic average is 3.6%.

The goods deficit widened to $1.7b in the March quarter, due to record high imports of petroleum, machinery and equipment (such as tractors).

“The price of imported crude oil rose 10% and the volume increased more than 5%," international statistics senior manager Peter Dolan says. "Imports increased over a range of commodities, which included tractors.”

Meanwhile, revenue from exported goods fell 5.9% from the December 2017 quarter’s record high due to lower dairy prices and a fall in the volume of meat exports.

"Whether the current account deficit is on the verge of widening further is looking more like an open question at present," ANZ economists say.

"On the one hand, world prices for NZ exports are elevated on the back of strong global demand (particularly from China), and NZ dollar depreciation is supporting exporter incomes and making imports less attractive at the margin."

Export weakness seen as temporary
They expect some of the weakness on the export side in the March quarter to be temporary. However, world inflationary pressures are rising, particularly oil, and trade tensions between the US and China could slow overall activity.

ANZ says there are no obvious implications in the data for tomorrow's March quarter GDP outcome. It is sticking with its forecast of a 0.4% increase over the december quarter in production GDP, with net exports dragging on real expenditure GDP.

Stats NZ says New Zealand is not out of line with two of its major trading partners. 

"The US and Australia have current account deficits of 2.6% and 2.3% of GDP, respectively, making our spending with the rest of the world a similar proportion as these countries," Mr Dolan says. He adds that China has a balance of payments surplus.

Meanwhile, the country's balance external balance sheet continues to look solid.

Net international liabilities shrank $126 million to $156.1b, or 54.5% of GDP, in the March quarter with inflow of foreign investment of $1.9b against a net outflow of $1.8b, mainly due to a rise in portfolio investment assets of $2.9b.

However, ANZ expects the income deficit to widen over time as global interest rates rise. 

The total value of foreign investment was $408.5b at March 31, while New Zealand investment abroad was $252.4b.

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