Peter Nicholl
The data for New Zealand’s current account for the year ended June 2023 was released recently.
We had a current account deficit of $29.8 billion. That is 7.5 per cent of our gross domestic product. It is in relative terms one of the largest current account deficits in the world.
The one area of the current account that has improved over the last year is the services part of the trade account. In the year to June annual services exports were $23.8 billion while service Imports were $29.9 billion, a deficit of $6.1 billion. Encouragingly, this was an improvement of almost $2.5 billion over the previous year, due to a big turnaround in travel services. As borders opened up, tourists started flowing again in big numbers both to and from New Zealand. But the net flow was very much in our favour. If this hadn’t happened the current account figures would have been even more bleak.
To put the size of our current account deficit in context, our neighbour, Australia, which has some economic and trade pattern similarities to us, had a current account surplus over the last year.
A current account deficit indicates that a country is spending more than it is earning overseas. This is often described by the international rating agencies, the IMF and most economic commentators as a country ‘living beyond its means’. None of the ratings agencies have yet lowered our international credit rating but all three of them have publicly expressed concern about the deficit’s size and trend and described it as the country’s key credit risk.
They will be watching its trend closely over the next year or so and if it doesn’t’ show improvement, a downgrade in our credit rating is highly likely.
New Zealand usually runs a deficit on what is called the primary income account, which is the amount overseas investors earn in New Zealand less the amount New Zealand investors earn overseas. In the past, New Zealand has often offset this deficit with a healthy surplus on the goods part of the trade account. But in the year to June 2023, we had a deficit of $12.5 billion on this part of our current account too. That was larger than the deficit in the previous year. The part of the current account that has usually been our strength is currently in poor shape – and getting worse.
This is happening at a time when economic growth is modest at best. This is usually a situation in which the current account position improves as we import less. The current account is going to be a serious brake on the ability of the New Zealand economy to grow much at all in the future. This suggests that a key focus of economic policy in New Zealand should be encouragement for the export sector.
But I have scarcely heard the poor current account position of the country or the need to encourage the export sector mentioned during the current election campaign. Whomever is in government after the election will be forced to look at it urgently and seriously as the problem is not going to go away. It could even get worse.
