As good as it gets?

Last week was the climax of the New Zealand quarterly data calendar, with March quarter GDP and current account data released. Both releases printed close to expectations and contained relatively little to surprise markets, confirming that the NZ economy is running along at a decent clip. But our view is that this may well be as good as it gets (on a quarterly basis at least), and we expect the pace of growth to moderate a little from here.

New Zealand’s current account deficit narrowed to 2.8% of GDP in the March quarter. And there were encouraging signs in the detail of the release, which helped to reinforce the message that New Zealand’s external finances have improved significantly since last decade.

The March quarter saw a further improvement in the goods balance, thanks to the turnaround in the performance of the agricultural sector following last year’s drought. Since then, not only have agricultural export volumes improved, but export commodity prices (especially dairy prices) have been particularly strong. There was also a solid improvement in the services balance. Spending by tourists has risen significantly over the last year or so (despite ongoing strength in the NZD), after being hit hard during the global financial crisis. The strong performance of the New Zealand economy was also reflected in improving profits for offshore owned firms. Arithmetically, this is a negative for New Zealand’s current account balance, but is another sign pointing to strength in the local economy.

In quarterly terms at least, this is likely to be as good as it gets for the current account balance for the near future (although in annual terms, the deficit could narrow a little further in the June quarter as a percent of GDP). The goods balance in particular is likely to deteriorate a bit under the weight of falling commodity prices. Yet over a medium-term horizon, we expect commodity prices to remain at elevated levels (relative to history) thanks to increased integration and trade with fast-growing Asian economies, especially China. Combined with a new, more cautious attitude by consumers toward their own spending, this should help the current around deficit to eventually settle around 4% of GDP – a significantly healthier level than the deficits of nearly 8% of GDP that were achieved in the 2000s.