New Zealand's current account data surprised some with the current account deficit for the year through December 2009 coming in at -NZ$5.47 billion versus consensus estimates of -NZ$3.33 billion, and the September quarter figure of -NZ$5.9 billion. The comparable figure in December 2008 was -NZ$15.97 billion.
Seasonally adjusted the current account balance during the December quarter was -NZ$3.11 billion, versus the small positive of NZ$0.04 billion in the September quarter of 2009.
The Current account deficit as a percentage of GDP also improved in December 2009 to an 8 year low of -2.9%, compared to consensus estimates for -2% and September's -3.2%; and a marked reduction from -8.7% in December 2008.
However this improvement will only be short lived as it is entirely driven by cyclical forces and one-off events. The current account deficit will undoubtedly widen again through 2010 and will likely return to levels greater than -5% as a percentage of GDP by the end of 2010.
The positive balance in September was partially made possible by large one-off tax provisions by the banks after a couple of large Australian owned banks lost court cases brought by the New Zealand Inland Revenue Department over structured finance transactions and tax avoidance.
Cyclical forces also played a critical role; New Zealand has a net international investment position of -90% as a percentage of GDP, thus if company earnings fall then so to will current account outflows... this is a bad way to improve the current account deficit.
The current account balance was also influenced by the goods balance which saw a marked turnaround due to imports falling faster than exports. New Zealand generally tends to have fairly stable exports; dominated by agriculture i.e. the volumes are fairly stable, but what has the most influence is soft commodity prices. Thus this was driven mostly by falling demand for imports.
Already the balance on investment income (-NZ$3.39billion) has returned to levels seen prior to the crisis driven by performance of direct investment (e.g. company subsidiaries in New Zealand). Another interesting point in the release was that the amount reinvested by international investors in direct investments in New Zealand grew to a record NZ$1.5 billion.
So to sum up, the New Zealand current account deficit improved, but primarily due to cyclical forces; the deficit will widen again through 2010 as the New Zealand economy recovers. The only things that will structurally improve the deficit are: Less spending on imports, more exports, and more saving (yes KiwiSaver will help) from both the private and public sectors.
Statistics New Zealand stats.govt.nz
Econ Grapher Analytics econgrapher.com
Disclosure: No positions