I wrote a column in June 2023 under the title “Worry about the balance of payments, not the recession’.
At that time, New Zealand had a current account deficit of $31 billion, or 8.5 per cent of our Gross Domestic Product – GDP. I wrote another column on this topic a few months later the title ‘New Zealand’s current account deficit is huge’.
Peter Nicholl
The September deficit was a little lower at $29.8 billion or 7.5 per cent of GDP so the trend was in the right direction. But it was still one of the largest current account deficits amongst developed countries. What makes the New Zealand situation worse is that it has had a current account deficit every year this century – that is over 20 years in a row.
The average annual deficit over that period was around three per cent of GDP. So recent levels at around eight per cent are enormous – and should be of huge concern to policymakers.
Balance of payments data for the year to June 2024, was released recently.
The annual current account deficit was $27.8 billion.
It is still trending down, which is good, but at a slow pace. The release of the data got very little media attention. We don’t seem to realise just how badly our external sector is performing.
We are living beyond our means – and have been doing so for a long time. Maybe we have been doing it for so long that we now think this is to be expected and is okay. It isn’t.
A current account deficit has to be financed in some way. Because we have been running current account deficits for so long, New Zealand’s net financial position with the rest of the world has been deteriorating rapidly.
As at June 2024, New Zealand’s net financial position with the rest of the world was -$205 billion.
That is not a misprint. It is billions not millions. And it is a negative sign. That means we have $205 billion more liabilities to the rest of the world than we have assets in the rest of the world.
That is close to 50 per cent of our GDP. This negative level has doubled in the last 20 years. This is a trend and level that will worry Rating Agencies – and should worry everyone else too.
The most recent ratings from the big three Rating Agencies, Standard and Poors, Moodys and Fitch, all left New Zealand’s sovereign credit rating unchanged (AA+) and also left the outlook stable.
That is also good but if our current account position doesn’t start to improve more rapidly than it has been doing recently, I expect the Rating Agencies to react negatively.
What worries me more is that we have been living beyond our means even though our economic growth has been relatively slow and we have built up a huge deficit in infrastructure investment in a lot of areas – hospitals, schools, roads.
Unless we improve our export performance substantially, we will not be in a position to finance accelerated expenditure on infrastructure.
In a small, open economy like New Zealand, the export sector is the key to our growth. In the last decade or so, many of our key export industries have been lumbered with additional costs rather than promoted. We can see the impact of this in our poor balance of payments performance.
