Balance of Payments stronger on the quarter, weaker on the year

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Auckland, September 19, 2018

The seasonally adjusted current account narrowed in Q2, courtesy of a narrowing goods deficit and widening services surplus.
However, the annual deficit widened 0.3% points to 3.3% of GDP on base effects.
Revisions widened the deficit by 0.1-0.2% points of GDP in the previous two quarters.
New Zealand’s net international liability position widened $1.6 billion from Q1 to $157.9 billion, but remained stable as a percentage of GDP at 54.6%.
Deficit below average

As is often the case in Q2, the unadjusted quarterly current account balance switched from surplus to deficit (from a downwardly-revised $0.1 billion in Q1 to -$1.6 billion), owing entirely to a narrowing services surplus on the back of the tourism-season wind down.
The mix of a wider quarterly deficit than we had expected and revisions to previous quarters saw the annual deficit land at $9.5 billion (3.3% of GDP) – around $1 billion wider than we had pencilled. Overall, the annual deficit remains below its historical average of 3.6% of GDP.
In seasonally adjusted terms, the quarterly current account deficit narrowed by $0.5 billion to $2.7 billion.
Services Surplus
As expected, this was driven by a widening services surplus ($0.1 billion to $1.5 billion) and narrowing goods deficit ($0.3 billion to -$1.4 billion).
On the services side, travel services exports (tourism) appears to be having a strong “off-season” (up $0.3 billion), supporting a record-high seasonally adjusted services exports print. However, a 2.9% rise in services imports (also a record high, with transportation services strong) kept the balance in check.
Recovery appearing
On the goods side, a recovery in the big three (dairy, meat and forestry) from Q1 saw exports growth outpace imports. But imports remain buoyed by decent domestic demand. The income deficit was flat at $2.8 billion, with a $0.1 billion narrowing in the primary deficit offset by a widening in the secondary balance.
International liability

New Zealand’s net international liability position (NILP) widened $1.6 billion to $157.9 billion, with the value of liabilities increasing on rising New Zealand equity values, with positive valuation changes for foreign assets and an increase in investment abroad providing a partial offset.
As a share of GDP the NILP was unchanged at 54.6%, suggesting a decent (1.0%) expansion in nominal GDP, after falling 0.4% q/q last quarter.
So where to from here? There are a number of offsetting factors that are (on balance) expected to eventually drive a slight widening in the current account deficit:
Offsetting factors
On the one hand, world prices for our exports have lost a bit of shine of late and with global growth looking past its peak there is little to suggest export prices will surge any time soon. However, the weaker NZD is providing some offset. While the terms of trade are expected to remain elevated, broadening global inflationary pressures and higher oil prices are expected to prevent any new record breakers any time soon.

Higher NZD import prices and easing domestic demand should constrain import volumes. Conversely, export volumes are expected to pick up, boosted by favourable weather conditions heading into the seasonal peak for dairy. Overall, the goods deficit is expected to continue narrowing from here.
Likewise, the services surplus is expected to remain buoyed with recent NZD weakness boosting tourist spend. However, despite ongoing stability in the stock of foreign-issued debt as a share of GDP, rising global interest rates are expected to drive a widening income deficit and ultimately a widening current account deficit.
Overall, sub-4% remains on the cards for the foreseeable future. Escalating trade tensions present a key risk to this outlook, as this could lead to a marked deterioration in global growth, and with it, demand for our exports.
There are no obvious implications from today’s data for tomorrow’s real GDP figures. We expect to see a 0.7% q/q expansion in production GDP. The drag from net exports to real expenditure GDP is expected to shrink as export volumes pick up from Q1.

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