But is expected to narrow over the course of 2023
New Zealand’s annual current account deficit widened to $33.8 billion in the last months of 2022, representing about 8.9% as a proportion of GDP – the highest on record since the mid-1980’s, according to ASB.
In ASB’s Economic Note, Mark Smith, senior economist, and Nathaniel Keall (pictured above), economist, said the deterioration in the current account balance has been swift, with the 8.9% deficit worse than the previous record of 7.8% (14.7bn) in December 2008 during the global financial crisis.
The increase was primarily driven by a substantial lift in the goods deficit, which widened by $1.8 billion to -$11.3 billion, with a modest advance in NZ’s export income (+$1.8 billion) more than offset by a $3.6 billion lift in import payments.
“Trade data already released by Stats NZ showed export volumes tumbling in Q4 after months of soft primary production, while import volumes have held up relatively well,” the ASB economists said.
Also remaining deeply in the red were the balances on the services and primary services accounts.
The primary income deficit, or the balance of what Kiwis earn from overseas investments and what overseas investors earn from New Zealand, increased by some $500 million to $11.9 billion annually – a slight increase that was offset by $1.3 billion increase in outflows.
NZ income from investments abroad lifted a little over $500 million to $11.9 billion annually, but that increase was again offset by a $1.3 billion increase in outflows.
The services balance narrowed by about $600 million annually, driven by a pick-up in NZ services exports as the border opened. Annual service export receipts increased by about $2.4 billion, while annual outflows grew by a more modest $1.7 billion.
“Still, the circa -$8bn deficit on the services component is far in excess of the $4-5bn surplus NZ was maintaining prior to the pandemic,” the economists said. “While plenty of NZers have been off gallivanting overseas, a chunk of local travel exports are still missing in action. Chinese tourism numbers are still far below pre-COVID levels, for example.”
ASB expected the NZ current account deficit to widen in the near-term, then narrow over the course of 2023 as tourism continues to recover.
“We expect the goods deficit to narrow as slowing domestic demand weighs on imports,” the ASB economists said in the Economic Note. “NZ primary production may be past its lows, with China’s reopening giving commodity prices a modicum of support.
“Services deficits will further narrow and eventually move into surplus as tourism inflows into NZ continue to recover (bolstered by a lift in Chinese visitor numbers over the latter part of the year) despite strong pent-up demand for kiwis to travel overseas.
“The primary income deficit is expected to narrow as NZ interest rate differentials with the rest of the world eventually narrow and rate cuts come into focus. Cooling NZ domestic demand will weigh on corporate profitability.”
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