Worse-than-expected current account deficit increases NZ’s economic headache

Wednesday, 18 September 2024

Economists are voicing unease after New Zealand’s current account deficit increased unexpectedly to $7.2 billion in the three months to the end of June, rising by $269m from the March quarter in seasonally-adjusted terms.

The figures were released on the eve of other data that is expected to show the country may be experiencing a “triple-dip” recession.

ASB senior economist Mark Smith said the size and trajectory of the deficit was “not great” and would put further pressure on the Government to keep its budget tight.

However, Finance Minister Nicola Willis said she didn’t believe the country’s credit ratings were at risk.

“I of course would like to see the current account deficit recover. It is certainly forecast to do so and, broadly, I would expect that to happen as we get our economy growing and recovering better,” Willis said.

Prime Minister Christopher Luxon said the deficit was the reason the Government was “out there hustling in the world making sure we expand trade and double the value of our exports in the next 10 years.”

Smith, along with other bank economists, had been expecting the quarterly current account deficit to shrink further, after peaking at 9.4% of GDP at the end of 2022.

But Stats NZ reported the annual deficit instead remained stuck at 6.7% of GDP, rising slightly to $27.7b in dollar-terms.

Westpac senior economist Darren Gibbs cautioned separately that the country’s high current account deficit and the Government’s budget deficit were jointly making its strong credit ratings vulnerable to downgrades.

The current account deficit is essentially the country’s overall ledger with the rest of the world, while the government or “fiscal” deficit is a measure of the degree to which the Government is spending more than it raises in taxation.

New Zealand had one of the world’s most highly-rated ratings for it sovereign debt, holding an ‘Aaa’ foreign currency rating with Moody’s and an ‘AA+’ rating from both S&P and Fitch, Gibbs said.

But he said its “significant current account deficit and private external debt and more recently its sustained fiscal deficit and rising public debt” made those vulnerable.

ANZ economist Henry Russell said the latest current account represented “no progress” and suggested the country could be facing “a long path back towards sustainable levels”.

“The narrowing in the deficit will be gradual, leaving us vulnerable to shocks and under the watchful eye of sovereign-credit rating agencies for some time yet,” he said.

Any downgrade to the country’s credit ratings could be expected to put upward pressure on the cost of servicing government and other debt.

Smith said the trajectory of the country’s trade with the rest of world had been worse than expected in the June quarter, in part due to vehicle imports, but it was the size and trajectory of the deficit in combination that mattered.

He still expected the deficit would return to a downward track due to weak domestic demand and lower interest rates on foreign loans, but said ratings agencies would want to see that improvement.

Willis announced in the Budget that it was not a given the Government would return to surplus by the year ending June 2028.

Smith said rating agencies would probably be watching that fiscal deficit more closely than the trade deficit.

“Traditionally, the Government is the ‘saver’ of the New Zealand economy. At the moment, it is not saving and that's really where the focus is.

“Households have reigned-in spending to some extent, but we are still probably living a bit beyond our means.”