Drop in outflow of direct investment income to weigh on New Zealand’s domestic economic strength

Current account deficit of New Zealand in Q4 2015 continues to be contained remarkably as compared to its long-term history. In the year to December 2015, the nation’s current account deficit narrowed to 3.1% of GDP, as compared with market expectations that it will remain stable at 3.3% However, looking at details, it does not give much cause for celebration. The overall deficit narrowed despite a deteriorating services and goods trade balances.

A sharp decline in the outflow of profits from overseas-owned companies in New Zealand mainly drove the headline result. Even if this is positive for the current account deficit, it does not bode well for the strength of the domestic economy. The New Zealand’s economy is likely to grow 0.7% in Q4 2015 after expanding 0.9% in Q3.

The current account deficit, in seasonally adjusted terms, broadened to $1.95bn in Q4 from $1.73bn in Q3. However, this was a smaller deficit from 2014’s resulting in a narrower annual deficit. Goods trade deficit broadened to $810m, worst quarterly data since 2008. The goods trade balance, in recent times, has been a tug of war between declining fuel import prices and falling dairy export prices. Meanwhile, the services surplus declined slightly to $977m, the first drop in two years. Fall in travel exports was the main factor. The recent figures bolster the sense of caution regarding the strength of tourism boom.

Primary income balance narrowed to a deficit of $1.975m. Mainly, there was a decline in the outflow of direct investment income. Even though this resulted in narrower current account deficit, it is not a positive sign for the economy.

The persistent moderate current account deficit indicates that the country’s overseas liability position has continued to rebound, narrowing to 61.4% of GDP. This balance is not being flattered to a considerable extent by pending earthquake reinsurance claims. The unsettled claims balance has contracted to $2.7bn from a total of over $20bn.