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External Accounts Infer Higher Saving Annual external deficit narrows further Despite much lower dairy export revenues Booming tourism, lower import prices part of the picture So too better debt servicing ratios It all supports a decent Q2 GDP print tomorrow NZ’s net liability position still large, but net debt at 13 year lows Goods Exports A Major Positive For Q2 GDP Qtly % change (s.a.) Merchandise Export Volumes 15 BOP deflated by OTI prices 10 SNA 5 0 The New Zealand economy continues to generate macroeconomic figures that are difficult to fault. Growth is strong, with tomorrow’s numbers highly likely to confirm it has pushed further above trend. This has flowed through to employment expansion and the unemployment rate has fallen to below average. Real wages are rising. The fiscal accounts are in balance. Inflation is low (although some see that as a problem). And, as today’s numbers confirm, even the nation’s usual Achilles Heel – the annual external deficit – has become somewhat less of a burden. Yes, a bit more productivity growth would be good, but, then again, wouldn’t it always?! NZ’s current account deficit narrowed to 2.9% of GDP in the year ended June 2016 from the 3.1% (revised from 3.0%) a quarter earlier. This was a mild disappointment for the market that was anticipating the annual deficit to be 2.6% of GDP (we had 2.7%). Some of the miss can be put down to historical revisions, with the rest due to a wider quarterly deficit in Q2 itself. The latter was driven by more spending by New Zealanders travelling overseas, boosting imports of services in the quarter. And, for us at least, imports of goods were materially higher than we had factored in (chiefly on balance of payments conceptual adjustments OTI -10 Mar-98 Mar-00 Mar-02 Mar-04 Mar-06 Mar-08 Mar-10 Mar-12 Mar-14 Mar-16 Quarterly Source: Statistics NZ, BNZ to the already published merchandise trade figures). Exports of services in the quarter were weaker than we thought, while there is more evidence that goods export volumes will be very strong in tomorrow’s GDP accounts. All this does not change our Q2 GDP estimate for tomorrow, which stays at +1.2% q/q. But the new colour on imports and exports above, does rein in our expenditure based measure that was getting very strong indeed. With today’s trade figures, our expenditure-based GDP estimate now sits at +1.3% q/q. This all suggests there is some upside rise to the +1.1% q/q market expectation for tomorrow’s Q2 GDP figure and a bit more to the RBNZ’s August MPS’s +0.8% view. It is not clear how the current account figures compare to RBNZ forecasts, given the Bank does not publish a quarterly track. What we do know is that the current account deficit is smaller than the 3.2% of GDP shortfall that the RBNZ forecasts for the year to March 2017. Bop Goods Imports Stronger Than Trade Data Implied Current Account Deficit Expected To Narrow Further Qtly % change (s.a.) Current Account Balance Annual total % of GDP 0 -5 Merchandise Import Volumes 20 Forecasts -1 15 -2 10 -3 BOP deflated by OTI prices 5 -4 0 -5 -5 -6 SNA -10 OTI -7 -15 -8 -9 00 01 02 Source: Statistics NZ, BNZ 03 04 05 06 07 08 09 Quarterly 10 11 12 13 14 15 16 17 18 -20 Mar-98 Mar-00 Source: Statistics NZ, BNZ Mar-02 Mar-04 Mar-06 Mar-08 Quarterly Mar-10 Mar-12 Mar-14 Mar-16 If indeed this quarter is a touch under the Bank’s forecasts then, at the margin, it might provide the Bank will a little less discomfort regarding the strength of the NZD. But we cannot be sure and there does look much in it in any event. Beyond the quarterly wiggles, the current account deficit is still trending narrower. This is a significant result in the context of much lower dairy export receipts following a major slump in international prices. Over the past year, there have been many other influences on the external accounts including: Services Trade More Than Offsetting Goods Trade Annual $b Goods and Services Trade Balances 6 Services trade balance 4 2 0 -2 Goods trade balance -4 -6 Booming tourism (with overseas visitors spending far more than New Zealanders do overseas despite the latter reaching a record in the latest quarter). Expanding export education Lower interest rates and lower debt ratios providing relief on the nation’s debt Lower oil prices significantly reducing the nation’s import bill Generally subdued import prices, given their often deflationary capital and technological concentration as well as economic slack globally All these and other developments are reflected in the major current account aggregates: Goods trade: annual deficit of $2,366m in the year to June 2016 from an annual deficit of $1,428m a year earlier. Services trade: annual surplus of $4,390m in the year to June 2016 from an annual surplus of $2,815m a year earlier. Investment income: annual deficit of $8,422m in the year to June 2016 from an annual deficit of $9,498m a year earlier. Lower income earned from foreign investment in New Zealand is part of this as is the lower cost of servicing the nation’s debt via lower global and domestic interest rates. Current Account Components Annual total % of GDP 6 Quarterly It is important to note that many of the large influences detailed above have their origin offshore which is well beyond the control of New Zealand. But the crux to how these things influence the external deficit is how the nation collectively responds to such developments. Ultimately, the nation’s external deficit is the difference between how much the country saves and how much it invests. New Zealand’s national saving has increased markedly over recent years. Indeed, from just under $1b in the year to March 2009, national saving lifted to almost $15b in the year to March 2015 (the latest official data). Our estimates suggest national saving lifted further to $17b in the year to March 2016 and indicators point to a further lift is occurring in the current March year. National savings is still shy of national investment. But the large increase in national saving over recent years has been more than the increase in national investment, such that the gap requiring funding from offshore has diminished – aka the current account deficit has narrowed (and even more so as a share of the economy). While the increase in national investment has been decent, it has perhaps been held back by such things as a general sense of uncertainty surrounding the world economic outlook. National Saving Has Lifted External Balances Annual $NZm Forecasts Goods and Services 4 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 Source: BNZ, Statistics NZ National Saving ex depreciation 20,000 BNZ estimate 18,000 2 16,000 14,000 0 Current Account -2 12,000 10,000 -4 8,000 -6 Investment Income -8 6,000 4,000 -10 2,000 -12 0 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 Source: Statistics NZ, BNZ Quarterly 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Source: Statistics NZ March year We see the annual deficit remaining at 2.9% in Q3 but remain of the view that the current account deficit will narrow further over the coming 12 to 18 months, towards 2% of GDP. Such a deficit would be well less than its 4.2% 10-year average. There are obviously many moving parts and global risks abound. But it is a benign outlook. It is certainly a lot more benign than many, including from officials, forecasts from a year or two back. Back then it was not unusual to see annual current account deficit forecasts of well in excess of 5% of GDP. It simply has not occurred. We were always a bit skeptical of such an extreme blowout in the external accounts. Progressively over the past year such views have been adjusted as the influences discussed above played out. Now with international dairy prices swinging sharply higher, there seems more chance that the current account deficit will narrow further. But there are many other factors including long term international interest rates attempting to push off extreme lows. We are also wary that New Zealand’s buoyant economy might generate materially more investment (and import) activity than we current anticipate such that the current account deficit does not narrow as much as we think. New Zealand’s international net liability position (IIP) remains large and is a source of vulnerability. It stood at 64.9% of GDP in Q2. The nudge wider in the quarter (from 63.9% in Q1) was mainly due to gains in the NZ share market that lifted the value of overseas-owned shares. While such revaluation dynamics seem to have arrested the downtrend in the IIP of late, the IIP as a share of the economy remains well below its peak over 80% during 2008/09. Yes, there have been concerns around the level of house prices and associated debt, as well as dairy sector debt especially since that sector’s incomes were hit hard by lower prices. But it is notable that New Zealand’s external debt as a whole eased down to 56.3% of GDP as at June 2016, from 56.7% in the previous quarter, to match that of six months ago, which was the lowest external debt ratio since 2003. Revaluations Driving The IIP At Present Net International Investment Position % of GDP -50 -55 -60 -65 -70 -75 -80 -85 -90 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 Quarterly Source: Statistics NZ, BNZ As External Debt Declines NZ Net External Debt % of GDP 90 85 80 75 70 65 60 55 50 Quarterly Source: Statistics NZ, BNZ Helping To Reduce Debt Servicing Burden Foreign Debt Servicing As % of exports of goods and services 25 20 Lower debt ratios and interest rate relief 15 10 5 0 01 More saving, a smaller current account deficit and a lower debt to GDP ratio provide the country with better buffers to international shocks than before. Such things will be viewed positively by the rating agencies. Maybe, just maybe, New Zealand’s Achilles Heel might be on the mend. 02 03 04 05 Source: Statistics NZ, BNZ [email protected] 06 07 08 09 Quarterly 10 11 12 13 14 15 16 Contact Details BNZ Research Stephen Toplis Craig Ebert Doug Steel Kymberly Martin Jason Wong Head of Research +(64 4) 474 6905 Senior Economist +(64 4) 474 6799 Senior Economist +(64 4) 474 6923 Senior Market Strategist +(64 4) 924 7654 Currency Strategist +(64 4) 924 7652 Main Offices Wellington Auckland Christchurch 60 Waterloo Quay Private Bag 39806 Wellington Mail Centre Lower Hutt 5045 New Zealand Phone: +(64 4) 473 3791 FI: 0800 283 269 80 Queen Street Private Bag 92208 Auckland 1142 New Zealand Phone: +(64 9) 976 5762 Toll Free: 0800 081 167 81 Riccarton Road PO Box 1461 Christchurch 8022 New Zealand Phone: +(64 3) 353 2219 Toll Free: 0800 854 854 National Australia Bank Peter Jolly Alan Oster Ray Attrill Skye Masters Global Head of Research +(61 2) 9237 1406 Group Chief Economist +(61 3) 8634 2927 Global Co-Head of FX Strategy +(61 2) 9237 1848 Head of Interest Rate Strategy +(61 2) 9295 1196 Wellington Foreign Exchange Fixed Income/Derivatives New York +800 642 222 +800 283 269 Sydney Foreign Exchange Fixed Income/Derivatives Foreign Exchange Fixed Income/Derivatives +1 212 916 9631 +1 212 916 9677 Hong Kong +(61 2) 9295 1100 +(61 2) 9295 1166 Foreign Exchange Fixed Income/Derivatives +(85 2) 2526 5891 +(85 2) 2526 5891 London Foreign Exchange Fixed Income/Derivatives +(44 20) 7796 3091 +(44 20) 7796 4761 ANALYST DISCLAIMER: The person or persons named as the author(s) of this report hereby certify that the views expressed in the research report accurately reflect their personal views about the subject securities and issuers and other subject matters discussed. 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