What a week. A whopping improvement in the current account deficit, a big upward revision to the dairy payout, an official – if tenuous – end to the recession, a huge leap in consumer confidence: no wonder the NZD was on a flyer.
The current account balance staged a spectacular improvement in the June quarter. The annual deficit narrowed sharply to 5.9% of GDP, from a revised 8.1% in the year to March (was 8.4%).
The goods balance (s.a.) was again in surplus despite the higher NZD: strong dairy export volumes were a saving grace. Import prices fell, and import volumes were down 22% from their peak a year earlier – a stark illustration of the impact of the recession on demand.
Services recorded a smaller deficit than in recent quarters, thanks to a bumper ski season and fewer overseas trips by New Zealanders. The investment income deficit narrowed sharply, partly thanks to the BNZ’s provisioning for a $661m tax bill, which reduced the deficit by some 0.4% of GDP in itself. But even allowing for this, income outflows were very soft as profits of overseas-owned firms took a substantial hit in Q2, a product of the drawn-out recession.
We expect the annual deficit to fall below 5% by year-end as last year’s spike in world oil prices continues to drop out of the equation. However, the import bill is likely to rise again as demand recovers through next year.
In even bigger news, Fonterra revised its forecast dairy payout for this season from $4.55 to $5.10/kg of milksolids – even assuming a NZD near US$0.70. This lifts farmer revenue by over $750m, the equivalent of 0.4% of GDP, and follows strong gains in USD dairy prices: up 56% in two months at Fonterra’s global auctions. We suspect the payout estimate includes a view that world prices will hold on to most of their recent gains as the world economy recovers. There are some supply-side positives too: US milk production is expected to keep contracting well into next year.
